Say you have a small business.
Say your small business is really small. You might even call it a microbusiness. You have a main job with a salary that provides your primary source of income. Your small business is more like a side gig.
Your small business isn’t incorporated—you don’t file a separate tax return or anything. So, you might be wondering, should you even bother keeping track of and deducting your business expenses? Isn’t saving all of those receipts an awful lot of work for not a lot of return?
First things, first. Let’s make sure what you consider a “small business” is actually a business in the eyes of the IRS.
Your small business first has to qualify as a business for the purpose of deducting expenses. In order to do so, you have to have what the IRS kind of creepily calls a “profit motive.” The profit motive rule is how the IRS tells the difference between businesses and “hobbies” for tax purposes. The basic rule of thumb for new business is this: you only have to show profit three out of five years to show profit motive. For businesses that get off to a slow start, that means you can actually lose money during your first two years, so long as you make money the three years after that.
If you lose money during a tax year, the IRS provides guidance for how to deduct that “net operating loss” (or “NOL”), but now that you are a business owner, you should really hire an accountant. (Unless your small business is “tax accountant,” in which case you should definitely do it yourself to save money.)
Small business? Check.
Got expenses? Double check.
Now to the question of whether you should keep track of and deduct your business expenses. Spoiler alert: the answer is always yes.
According to the IRS, you can deduct business expenses that are “both ordinary and necessary.” “Ordinary” simply means that an expense is an ordinary expense for someone in your line of business. “Necessary” might seem like a high burden to meet, but actually it isn’t. The IRS explains that “an expense does not have to be indispensable to be considered necessary.”
You can also deduct a portion of your home that you use as a home office, and you can deduct the mileage that you drive for work purposes at whatever the going federal mileage rate is. Right now the federal standard mileage rate (for cars, vans, pickups and panel trucks, oh my!) is 54 cents. (You can keep up-to-date on the federal mileage rate here.)
Between all of those ordinary and necessary expenses, your home office, and your mileage, the expenses you can deduct really start to add up. They are worth keeping track of so you can deduct them at the end of the year.
One of the most common complaints really-small business owners have about tracking their business expenses is the general annoyance of keeping up with the multitude of small transactions. I get it: small business, small transactions. I have a small business, too.
Rather than trying to extract each individual business transaction from your personal checking account or personal credit card, open a separate checking account or credit card (or both!) for your business.
Don’t commingle your business and personal expenses. Keep your business expenses strictly business.
One benefit of having separate accounts, and bank cards for doing your business shopping, is the ease of tracking business expenses. At the end of the month, your business expenses are in one account, and your personal expenses are in another. Furthermore, if you have a business checking account, your business payments can go into that account, and you can start to get a sense of how much you are making versus how much you are spending.
Even if your small business is a microbusiness, this kind of “financial hygiene” is really important come tax time and in case of an IRS audit.
And, no, it isn’t an awful lot of work. At least not any more.
Bookkeeping software has undergone a complete revolution in the past five years.
What used to be ungainly, slow, downloaded crapware is now sleek, beautiful, cloud-based awesomeness. (Full disclosure: I’m writing this column for a bookkeeping software blog. Also, if you are still using Internet Explorer 6, we can’t be friends.)
Unfortunately, in some cases, you have to pay for that awesomeness, and the monthly fees can seem high. It might feel like the software isn’t worth (a) the price or (b) the trouble.
You already know what I’m going to say. The software is worth it. The software is worth the price because, well, our online accounting software is free.
And they’re little-to-no trouble these days, either. Remarkably, because there’s good competition in bookkeeping software now, the software companies figured out how to be easy to use. The user interface is intuitive. And, ZipBooks syncs—no, really—with your bank account (the business account that you set up) so that you don’t have to manually type transactions in.
With bookkeeping software, you can quickly see a profit-and-loss statement for your business—and your accountant can, too. You can track how much you are spending on certain kinds of expenses. You can see which clients earn you the most money, and which ones don’t—and perhaps therefore need to be let go for being such dead weight.
The point is, bookkeeping software gives you information. And once you have that kind of data about your business, you can run your business better.