Death and taxes. Many have tried to avoid them; none have succeeded. Every year, business owners dread the steady march towards April when the financial grim reaper demands retribution.
Sounds a bit over-the-top, doesn’t it? Staring down piles of receipts you meant to file last August would scare even the hardiest business owner. Peace of mind comes down to a bit of knowledge and organization.
Evelyn Jacks, president of The Knowledge Bureau and a leading financial expert, says one of the best things a small business owner can do is find a financial advisor. Whether determining asset allocation strategies, maximizing tax savings, or planning the economical health of your business, financial planners are worth every penny.
Hit the books
“All of your accounting must be up to date and retrievable,” says Jacks, author of over 40 books on taxation.
Bookkeeping is often put in the corner while day-to-day obligations of the business take precedence. But if business expenses aren’t recorded, there’s no opportunity to use them as deductions. Make a habit of spending some time each week maintaining your books and when April arrives, you’ll be in good shape.
Software programs like Quicken and Simply Accounting are great ways to keep your accounts in order. Automation is critical, says Jacks, but it’s not enough. Business owners still need to understand accounting theory to get the most from the program and for proper financials. A basic accounting course is well worth the investment, says Jacks:
“You have to understand how the money flows.”
Elizabeth Potts Weinstein goes one step further:
“Hire a bookkeeper.”
Attorney, financial planner and radio host, Potts Weinstein says the best tip for paying less in taxes is to keep better books so you don’t miss deductible expenses:
“A bookkeeper should be the first hire your business makes since it’s something you are probably not good at and you hate doing,” she says, adding a bookkeeper can get your books in shape much faster than any software program.
It can be tough, but personal and business expenses must be separated. Separate bank accounts and credit cards for your business make it easier to track expenditures – and ease the pain of an audit. Knock on wood.
“What’s key is that you make allowances for that,” adds Jacks, “you can use your personal vehicle for business purposes but can’t claim 100 per cent of it.”
Make sure you choose a credit card that works for you. Some “business” credit cards offer a few extra perks but charge more interest. If you don’t need them, consider an extra personal credit card for your business, says Potts Weinstein. Any interest accrued may be deductible.
If you work from home, this also applies to home expenses. If you have a room or area dedicated to your work, a percentage of expenses, such as utilities, can be deducted.
If you have kids, put them on the payroll. As employees, they are deductions and their salary can be put aside – for college, vacations, or other expenses. Any salary you pay your child must be reasonable, for work actually performed, to the benefit of your business, and for which you would otherwise hire a stranger.
If you need to pay for childcare services, that’s also deductible. Consider your relatives; if you have a parent wanting to make some extra money, they get paid and your child is cared for.
Whither incorporation?
Should you incorporate or not? There are advantages to both.
Unincorporated businesses can lump their business and personal income together. Since new companies have a lot of startup costs, these deductions can decrease your net income, so you pay less tax overall. In fact, excess losses may be carried back to offset other income and taxes paid in any of the previous three years.
Incorporated businesses are subject to lower tax rates. Also, family members can be shareholders in the company, and receive dividends. This has long-term implications and benefits if you plan on eventually selling your business.
Hit the reset button
If you’ve gained tax-saving knowledge over the past few years and wish you could re-file past returns, here’s some good news: you can. This is the value of excellent bookkeeping. If your records are complete, going back years to find additional tax savings is a snap.
Don’t forget to pay yourself. If you can contribute to personal retirement plans like RRSPs or 401Ks, you can cash in on big tax benefits.
Paying yourself benefits will reduce the taxable income of your business, says Potts Weinstein. It will also keep you healthy and help save for retirement.
To make 2010 one of your best tax-saving, income-building years, look to the future.
“On a broader, more strategic basis, it’s important to concentrate on working ON the business and not just IN it,” says Jacks.
Growing and remaining sustainable over the long haul should be your constant focus.
Building your business deserves that attention.
