The pandemic created a lot of new business owners who had little or no business experience. Many of these people, for the first time in their lives, found themselves having a business instead of a job because of changes that gave them little or no choice.
To their credit, they learned to adapt, selling products on eBay or Amazon, becoming gig workers driving for Uber or Lyft, or just providing products and services to their friends and neighbors. Some even set up business entities like LLCs and S-Corporations.
What most did not do is learn what kind of records they would need at tax time. Worse yet, some got bad advice from friends and neighbors about how starting a business would magically make all their expenses, personal and business, tax deductible.
The fact is that having a business does not make your personal expenses deductible. For expenses to be deductible they must be “ordinary and necessary” as well as “ordinary and customary”, to the business.
You also need to keep good records of gross income received as well as for your business expenses. Gross income is the total income (payments) you get from your customers or clients. If you sell something for $100.00 the $100.00 sale price is the gross income from that transaction. If you purchased the thing you sold for $25.00 then you have cost of goods sold of $25.00 and a gross profit of $75.00. At tax time you will need a way to provide the total gross income from all sales for the year as well as the total cost of goods sold for the year. You will also need to be able to provide total for other expenses by category so that net taxable income can be determined.
In addition to tracking what you receive and what you spend, you also need to maintain receipts and other documentation that can be used to prove your deductions were business related in the event you are audited by the IRS. ATM transactions on your bank statement or credit card statements are not enough to prove a deduction to the IRS. You need receipts showing what you purchased, from where, and when you purchased it.
As a new business owner, you probably do not need the monthly services of an accountant for your bookkeeping but if you don’t know what kind of records to keep and how, then it pays to schedule an appointment and speak to an accounting or tax professional about what you need to ensure you have what you need at tax time and/or if the IRS comes calling. It’s also a good idea to do a little tax planning and learn how much you should put away for income taxes.
Our firm offers free consultations for new business owners. The reason we offer these free consultations is that we have seen too many people who did not know the simple steps they should take as a business owner until it was too late. Let us help save you from that fate. Give us a call to set up your free consultation today at 954-563-1269.