Expenses 101 for New Business Owners
Expenses 101 for New Business Owners
04 March 2021
One of the biggest challenges you’ll face when setting up your own business is accounting. Keeping track of your expenses is especially critical, as it can save you money in the long run. As Bench explains, expenses that are eligible for tax deductions ultimately result in a lower tax bill because you subtract them from your taxable income. Read on for basic best practices on how to track, organize, and manage expenses.
Figure out your tax obligations:
Knowing your tax obligations can help determine what costs are eligible for potential write-offs. Your tax payment and reporting requirements are partially determined by your business structure, e.g. a limited liability company versus a corporation. The Corporate Finance Institute describes the differences. An LLC is usually a smart choice for small businesses, as it helps to protect personal liability, offers tax advantages, and is easier to set up than a corporation. Check your state’s requirements for LLC formation to get started and enlist the assistance of a business formation service to get your startup formally established.
Open a business bank account:
A business bank account helps to separate your personal and professional finances. It’s important to set this up so you can easily see your income and expenses in one place. This will also prove useful if you’re ever audited by the Internal Revenue Service. Even if you’re a small business, an audit is possible! In fact, the IRS plans to increase audits of small businesses ahead, according to Bloomberg. To minimize banking fees, you can consider opening up an online account. Business.org has a comparison of the best business bank accounts worth checking out. When you buy anything for your business, make sure to expense it to your business bank account, not your personal one.
Store your expenses safely:
You should save all of your expense notes. If you are audited, failing to provide the IRS receipts to prove your deductions is a big problem. Keep digital expense notes in a separate folder on your computer and make sure to back them up. You might consider investing in an external hard drive to hold your business documentation — or check out cloud-based storage services. PC Mag has a list of the best solutions for small businesses. Scan paper expense notes so you have a backup and the originals in waterproof document folders. Smead has tips on organizing financial papers, like stapling receipts to the warranty.
Establish a bookkeeping system:
Track your expenses on a monthly (at least) basis. First, decide on a bookkeeping system. You can use a software product or you can outsource the job. Also, decide whether you’ll use cash versus accrual accounting method. According to this Study.com financial accounting course, with the cash method, you recognize revenues and expenses as soon as they’re paid. With the accrual method, you recognize revenue and expenses as soon as a transaction occurs. For example, if you invoice a client for $100, you count that as revenue — even if they haven’t paid yet.
This guide provides an introduction to handling expenses as a small business owner. If you need more help, check out this basic accounting skills module on Udemy. Still lost? Consider hiring a pro to handle your accounting and keep your expenses in order. You don’t have to handle every single detail of your small business operations personally. Outsourcing such tasks frees up your time and allows you to focus on your business’ main offering.
External guidance can be useful when you’re getting your company off the ground. With resources like this one, Tudip gives small business owners the tools they need to succeed. We also offer a suite of services designed to help young enterprises thrive, from product engineering and mobile development to quality assurance. Find out how we can help you.