Being your own boss has such a nice ring to it. Maybe it’s something you have dreamed of being for a long time now. Beyond the enviable advantages of working in your pajamas, setting your own hours, and representing great companies, you also get the added benefit of deducting business expenses on your taxes.
That means all your start-up and regular, work related monthly costs are deductible. So, if you needed a VoIP phone service or a new computer, as I did when I started, you can deduct those cost come tax season.
Why worry about it at this point?
Well, because the IRS lays out specific guidelines to business owners about keeping accurate financial records, among other things. Plus, getting in the habit of accurate, consistent record keeping right from the start will ensure that:
- You don’t miss any expenses because you can’t find that darn receipt.
- Tax season will be a breeze and your tax professional won’t have to charge you extra for making sense of the shoe box full of gnarly receipts you have been accumulating.
- You will be in the know and in total control of your business finances which will help you make strategic, meaningful business decisions, build or maintain a robust credit profile, and make it easier for bankers to approve you for a small business loan or line of credit.
Don’t spend for the sake of deductions
Sometimes, knowing that you can deduct something on your taxes can be a strong incentive to spend more than you normally would on things you don’t really need. Though deductions are a perk, they are never going to directly offset unnecessary expenses. If you overspend on something, or a lot of little somethings, it can have a dramatic effect on your cash flow and credit optimization and can cause you to struggle for months before you ever get that refund. In such cases, the costs of having something, can out-way the reward. The best way to avoid such issues is to prepare in advance in the business planning phase. Then,before going shopping, develop what I call a a spending strategy.
Beware of things that raise red flags at the IRS
Wanting to remodel that bedroom/junk room you cleared out the corner of for your home office? Now that you have a legitimate business, those remodeling costs are probably deductible too! There is also a home office deduction that many independent contractors and self-employed enjoy. It is advisable to discuss this with a trusted tax professional or with the IRS though, as home offices seem to be one of several things for which the IRS raises their eyebrows.
Consistent record keeping come tax time will not only save you embarrassment with your tax pro, but is also exceptionally gratifying and a good business practice no matter if you’re just starting out or a seasoned business owner.