Entrepreneurs are tasked with not only managing their business finances, but their personal finances as well, and when needs, circumstances, and priorities don’t align with the two, managing it all can feel overwhelming. To keep personal finances from getting pushed to the side, below are some tips to help you handle your own money while overseeing your business’s.
Plan for Rainy Days
Building an emergency fund for rainy days is not novel advice, but business owners might want to stash away even more than the recommended three to six months’ worth of living expenses. Are you prepared for circumstances like irregular fluctuations in cash flow, loss of a major client, or a national pandemic? Keep in mind that the purpose of an emergency fund is not to earn a big yield on this money but to be sure it’s there and accessible, so keep it in an FDIC-insured cash bank account.
Separate Business and Personal Finances
When you first start a business, open a business bank account and apply for a business credit card for business expenses. In addition to helping you build business credit, this will streamline your tax prep during tax season, lend more credibility to your business as an actual business, remove personal liability in case of adversity, and eliminate the burden of your business’s financials from your personal accounts.
Automate Bill Payment Schedules
A common personal financial tip is to automate your bill payment schedule, so consider carrying this practice over to your business finances as well. This will hep to prevent you from getting overwhelmed with both personal and business bills, thereby avoiding late payment fees and knocks to your credit score.
Manage Your Personal Credit
You know how crucial good credit is for your business, so it makes sense to keep your personal credit in check as well. Be sure to pay bills on time even if there are months when you can only make the minimum payment. Also be aware of your credit utilization (the percentage of credit that you’re actually using versus your total available credit limit). Keeping your credit utilization below 30% will keep your credit in good standing for loan approval.
Save for Retirement
Although it’s typical for business owners to invest profits back into their business, you still need to prepare for retirement, and investing and diversifying your savings may help you save more money for retirement than you could as an employee. SEP IRAs, SIMPLE IRAs, Solo 401(k)s, and SIMPLE 401(k)s are all retirement plan options available to small businesses. Research each one to determine which would be the best fit for you and your business. As for diversifying investments, look into options like stocks, bonds, ETFs, and money market mutual funds. Allocating your assets into different funnels will give you some breathing room should your business experience a struggle period.
Look to Tax Professionals
It’s no secret that U.S. tax laws are complex, and different business entities have different taxation rules. An accountant or tax professional can help you determine what your obligations are. To streamline the process, be sure to keep clear and organized records all year long.
With the learning curve of the first tax filing season in the TCJA era behind us, year-end tax planning is a perfect time to incorporate those lessons learned. Here is a general overview of some steps business owners can take in their year-end tax planning.
If your business has acquired a fixed asset or property (one that you don’t intend to sell for at least one year and will be used to earn long-term income), and it’s placed in service before the end of the year, you can typically write off the cost in 2019. Thanks to changes made by the TCJA, this now applies to both new and used assets. The TCJA boosted the deduction limit to $1.02 million with a phase-out threshold of $2.55 million for 2019. It also increased bonus depreciation to 100% for property placed in service after September 27, 2017 and before January 1, 2023.
The IRS recently clarified that food and beverage costs are deductible by 50% in certain circumstances and when those costs are stated separately from entertainment on invoices or receipts.
One of the most significant changes made by the TCJA affects owners of pass-through entities (partnerships, S corporations, and LLCs) as it authorized a deduction of up to 20% of the owner’s qualified business income (QBI) for the tax years 2018 through 2025. The QBI deduction is reduced for some taxpayers based on the amount of their income, so some individuals may need to consider reducing their taxable income so it falls under the $157,500 threshold ($315,000 for married filing jointly), whether by making contributions to retirement plans or health savings accounts, or even through charitable contributions. Something to keep in mind is that specified service business owners, which includes most personal-service providers, are not eligible for the deduction if their taxable income is above a certain threshold.
It isn’t a bad idea to complete minor repairs by the end of the year because the deductions can offset taxable business income. However, costs of improvements to business property must be written off over time. If you’re unsure whether a specific renovation or upgrade falls under a repair or an improvement, the IRS recently issued regulations that clarify the distinctions.
Estimated Tax Payments
If your corporation is anticipating a small net operating loss for 2019 but a substantial net income in 2020, you might think about accelerating just enough of the corporation’s 2020 income to create a small amount of net income for 2019. You could also choose to defer some 2019 deductions. This way, rather than having to pay estimated taxes based on 100% of your 2020 taxable income, you will be able to base your estimated tax installments on the comparatively small amount of income shown on your 2019 return.
With additional guidance and regulations released consistently since President Trump signed the Tax Cuts and Jobs Act of 2017 into law, one thing remains clear: strategic tax planning is key to lowering a business’s total tax liability. Read on for some moves on lowering your 2019 business tax bill.
Establish Tax-Favored Retirement Plan
Current tax rules allow for significant deductible contributions, so if your business doesn’t already have a retirement plan in place, it’s worth considering. Small business retirement plan options include 401(k), SEP-IRA, SIMPLE-IRA, and the defined benefit pension plan. Some of these plans can be established up until December 31 and allow for a deductible contribution for the 2019 tax year, except for the SEP-IRA and SIMPLE-IRA, which mandate a set-up deadline of October in order to make a contribution for the same year.
Review Your Reports
The end of the year is typically a time for businesses to begin goal setting for the next year, so it’s crucial to have a firm grasp on how your business performed financially this year. Make sure your books are up to date and accurate so you have a clear picture before diving into next year’s plan.
Defer Income If It Makes Sense
Depending on where your income level is, you can potentially cut your tax bill by postponing any end-of-the-year income until January 1 or later. Ask your accountant if shifting receivable income to the new year makes sense for your business.
Purchase Business Essentials to Take Advantage of Deductions
Upgrade equipment and furniture, stock up on office supplies, take care of repairs, and make vendor payments in advance in order to maximize deductions. And thanks to the TCJA, you can claim 100% bonus depreciation for qualified asset additions that were acquired and put in place in 2019.
Make Charitable Contributions
Tis the season for giving…and claiming a deduction for the fair market value of your donations. In addition to money, think outside the box and contact a program that sponsors families for the holidays. They often need food, bedding, toys, cookware, and clothing. It’s a great way for employees to feel like they’re making a difference too. Just don’t forget to get the necessary documentation and receipts to keep with your records.
Start Preparing for Next Year
If you put these tips into action, you’ll be better prepared at this time next year. For instance, you’ll already have a retirement plan in place. By going through the process of tax preparation this year, you have the opportunity to create systems for organization that will expedite the process next year.
Most small businesses have limited financial resources, so managing funds wisely and intentionally is crucial to the success of the business. Below are ways in which your small business may be throwing away money that could be needed elsewhere.
Having Overheads that Exceed Profit
It might be common sense, but if you’re not making enough profit to cover your expenses, trouble is on the horizon. Even entrepreneurs can be financially-challenged, so it might be worth it to enlist the help of an accounting professional. Additionally, you should identify the most profitable aspects of your business as well as the ones that are draining resources, and make adjustments however needed.
Consider whether your full-time staff is absolutely needed. Could some positions be just as effective in part-time, seasonal, or freelance roles? Too, make sure you’re tapping into your employees’ full potentials. Get to know their interests and individual areas of expertise in order to increase productivity, propel your business forward, and offer new ways to motivate employees to take a vested interest in the success of your business.
Advertising and Marketing Expenses
As a small business owner, you likely don’t have money to waste on untargeted marketing or costly advertising campaigns. Your best bet is probably content marketing, a.k.a. blogging on your website. Brush up on SEO – or tap into the unidentified skills of your employees – to make sure your posts are keyword-optimized and pop up in search engines. Not a writer? Again, tap into the skillset of your employees, or hire a freelance writer. Lastly, think about finding someone to manage your company’s social media accounts and Google ad campaigns.
Trade Shows and Conferences
Though they’re a great way to network while promoting your products or services, they’re often expensive. When funds are tight it’s wise to be choosy about which ones you attend. If one or two specific trade shows or conferences have proven to produce sales and benefit business, just concentrate on having a presence at those venues and forgo the ones that might not be worth the cost.
The Latest Technology
In most instances you really don’t need the latest and greatest that technology has to offer. For example, if you buy a sophisticated software program that requires outsourced labor at a significant cost just to maintain simple records, you might want to rethink whether such a costly program is worth it. Cloud-based services are available to small businesses at low to no cost.
Weak Expense Tracking
If your love as an entrepreneur is building new products, or networking and finding new clients, tracking expenses is likely something that falls on the back burner. Finding a detail-oriented and trustworthy employee to handle this task will benefit your company’s bottom line – and free you up to focus on your strengths. And on your employees’ end, if they know someone is keeping tabs on their spending, they’re likely to be more frugal with company expenses.
Credit Cards and Insurance
Routinely keeping credit card balances in check might seem like a menial housekeeping task, but with interest rates almost always greater than 20 percent, failing to pay your credit cards in full each month is a costly mistake for a small business. Likewise, be sure you’re getting the lowest possible insurance rate for your company to avoid excessive costs. You might also benefit from an independent insurance agent who can go to bat for you when you’re hit with a claim.
With the overwhelming amount of pressure and decisions to make when starting a small business, stress can cause even savvy industry gurus to fall for common startup mistakes. In the best scenarios, mistakes will set you back a bit, but in worst-case scenarios, they can hurt your potential and outlook for long-term success. Below are common startup mistakes that can have a negative impact on your small business.
Miscalculating Startup Costs
The perils of starting a business with an insufficient budget, or an underestimated one, can be a shot in the foot before you even get running. Plan to have at least six months’ worth of income in the bank before officially cutting the ribbon to open your business. This will give you some time to get up and going, garner some clients, and generate invoices and payment.
Neglecting to create a marketing strategy
Most new businesses are going to have to put some brain power and cash behind a good marketing plan, and this should be done well in advance of turning on the lights for customers and clients. These plans should include online, offline, social media, and any other means of marketing to get the word out. Will marketing and social media be outsourced, will you handle it personally, or will you bring someone on board to solely handle this task?
Failing to be frugal
Whether through a bank loan, a generous loan from a relative, sales of your own assets, or years of saving your own money, you’re going to have some capital to spend on rent, equipment, products, employees, etc. Keep in mind that profits won’t roll in overnight. Spend your savings wisely, do your research, and make your money stretch.
Thinking you can be a one-man operation
Even if you’re a one-man or one-woman business in the beginning, you’ll need people in your corner. You’ll inevitably want to shoot around ideas with someone; you may need someone, even on a very part-time basis, just to handle invoices and office files; you’ll want feedback, advice, and even potential contacts. Consider if it makes sense for your business to create a board of advisors.
Are your employees reimbursed for work-related travel expenses? If not, you might want to reconsider. Changes under the Tax Cuts and Jobs Act make reimbursements even more attractive to employees.
The new tax code implemented significant changes to moving and travel expenses, including business-related travel expenses incurred by employees. Under the previous law, work-related travel expenses that weren’t reimbursed were generally deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to take advantage of the deduction because they a) didn’t itemize deductions, or b) didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.
With the new tax code, business travel is still entirely deductible, but not by individual taxpayers because miscellaneous itemized deductions, including employee business expenses, are no longer permitted to be claimed on individual tax returns. Instead, only businesses are able to deduct these expenses, which is why business travel expense reimbursements are now more significant to current employees and more attractive to prospective employees.
In order to be deductible, travel expenses must be valid business expenses and the reimbursements must adhere to IRS rules – either with an accountable plan or the per diem method.
Employee expenses reimbursed under an employer’s accountable plan do not contribute to the employee’s income. The accountable plan is a formal agreement to advance, reimburse or grant allowances for business expenses. To qualify as an accountable plan, it must meet the following criteria:
- Payments must be for “ordinary and necessary” business expenses
- Employees must substantiate these expenses (including amounts, times, and places) monthly
- Employees must return any advance or allowances they can’t substantiate within a reasonable time, typically 120 days
Plans that fail to meet these guidelines will be treated by the IRS as “non-accountable”,
and reimbursements will be included in the employee’s gross income as taxable wages subject to withholding and employment taxes (employer and employee).
In some cases, the per diem method may be used. Instead of tracking actual business travel expenses, employers use IRS tables to determine reimbursements for lodging, meal, and incidental expenses. Substantiation of time, place, and amount must still be provided, and the IRS imposes heavy penalties on businesses that routinely pay employees more than the appropriate per diem amount.
If you have any questions about the TCJA’s impact on your business, please feel free to reach out to me at firstname.lastname@example.org.