| If you operate a small business, you know that you | | | | A general rule about tax accounting: Any deduction |
| need a decent, working accounting system, right? | | | | that's been abused by taxpayers in the past is |
| Decent accounting means you know things like | | | | probably closely watched by the IRS and the state |
| whether or not you're making money. And such a | | | | revenue folks. And that close monitoring almost |
| system lets you make better decisions about the | | | | always means that in order to take the deduction you |
| products and services you sell and which customers | | | | need to go to a bunch of extra bookkeeping work. |
| and employees you want to work to keep. | | | | That extra bookkeeping work not only costs you time |
| Unfortunately, small business accounting isn't always | | | | and money, the extra work also tends to truly |
| easy or straightforward. Accordingly, consider these | | | | complicate your accounting. |
| five tips to simplify your business's bookkeeping. | | | | With a car, for example, deducting some portion of |
| Tip #1: Don't Incorporate | | | | your auto expenses will require you to carefully track |
| Incorporation complicates your accounting. By | | | | all of your car expenses (fuel, service, insurance, and |
| incorporating, for example, you'll automatically add | | | | so on) and also your business, commuting, and |
| payroll accounting to your bookkeeping duties--even if | | | | personal use of the vehicle. Furthermore, whenever |
| you're the only employee. | | | | you trade-in your "business vehicle," you or your |
| What's more, by incorporating, you'll typically have to | | | | accountant will also probably have to do the tax |
| provide more information when you do your tax return | | | | accounting for a like-kind exchange. |
| than is the case if you operate as a sole proprietorship. | | | | Seriously, small businesses commonly make the |
| A corporation tax return is several pages long, for | | | | mistake of deducting items like cars only to find (if |
| example, as compared to the typical one or two page | | | | they're honest with themselves) that after all the |
| sole proprietorship tax form. | | | | wailing and gnashing of teeth (and perhaps a bit of |
| If you want to incorporate for legal reasons, by the | | | | dishonesty, too) the deduction saves only an extra |
| way, you should know that you have another option | | | | two to three hundred dollars. |
| for limiting your liability. You can set up a one-owner | | | | Tip: Do keep track of any business miles so you can |
| limited liability company. A one-owner business | | | | claim the easy standard business miles deduction. That |
| operating as a limited liability company is treated for | | | | deduction, for many businesses, is an easy tax |
| tax accounting purposes as a sole proprietorship. | | | | deduction. |
| Tip #2: Don't Depreciate | | | | Tip #4: Do Consider Using Cash-basis Accounting |
| If your business is profitable or if you or your spouse | | | | Tax laws don't allow all businesses to use cash-basis |
| have earned income from wages and you're operating | | | | accounting. For example, if your business resells |
| as a sole proprietorship, you may be able to use | | | | inventory or manufactures items, you probably can't |
| something called the Section 179 election to avoid | | | | use cash-basis accounting. |
| dealing with depreciation. | | | | However, service businesses typically can use |
| Rather than go to the bookkeeping burden of allocating | | | | cash-basis accounting. And cash-basis accounting, |
| a $500 desk as "depreciation" expense over seven | | | | while a little frowned upon by accountants, should |
| years, for example, you can use the Section 179 | | | | always been considered if the resulting accounting lets |
| election to just immediately write off the entire $500 | | | | you prudently run your business. |
| furniture cost in the year you purchase and begin using | | | | Cash basis accounting simplifies your accounting |
| the asset. | | | | because you don't have to setup and then work with |
| Not all states allow Section 179, so you'll want to | | | | an accounts payable system. And because you don't |
| confer with your tax advisor. But by simply writing off | | | | have to do accrual journal entries at the end of each |
| asset purchases, you greatly simplify your accounting. | | | | month and year. |
| You don't, for example, find yourself a few years | | | | Note: The popular small business accounting program |
| down the road doing the depreciation calculations for, | | | | QuickBooks lets you do both cash-basis accounting |
| say, several dozen or several hundred items you've | | | | and accrual-basis accounting. |
| purchased. Ugh. | | | | Tip #5: Do Consider Outsourcing |
| Note: Most assets that a small business purchases | | | | A final quick tip that's especially applicable once you |
| can be immediately expensed using the Section 179 | | | | have employees: You should consider outsourcing |
| election. Some assets can't, however, including real | | | | your accounting, or some part of your accounting, |
| estate. | | | | once you've got employees or too little time to do the |
| Tip #3: Don't Combine Business and Personal Items | | | | job yourself. |
| Another tip for keeping your business accounting | | | | And this outsourcing option is actually very simple, |
| simpler: Don't combine business and personal items. For | | | | straightforward, and even economical as compared to |
| example, setup a separate bank account for the | | | | the options of letting your books turn into a mess or |
| business and use that account only for business | | | | hiring a modestly competent full-time bookkeeper. |
| deposits and withdrawals. | | | | You can typically pay a service bureau a couple of |
| Another example... Don't go try to buy a car, call the | | | | thousand dollars a year, for example, to do your |
| purchase a business expense, and then attempt to | | | | payroll. And a few hundred dollars a month is often |
| deduct a portion of the car's price and operating | | | | enough to pay for a general bookkeeping service. |
| expenses. | | | | |