A growing number of people are facing the prospect of no job. We’re in a recession, without a doubt. There is one industry that ALWAYS grows in times of recession: small, home-based businesses. With no job, starting a business might seem like the only solution. And, done right, it can grow beyond anything you can expect.
If you’re in that spot, or are concerned that you might soon be, then today’s post is for you. It’s the 3 steps you must take to ensure you get all the tax breaks you can.
There is another piece as well: your mindset. Going from the Employee Mindset to the Entrepreneur Mindset requires a shift. Some people, sadly, can’t ever make it and their businesses almost always fail or never even get started. Do you have the Entrepreneur Mindset? Find out with my blog post today at BusinessToInvestment.
Here, though, let’s talk about the practical accounting/tax side of your first business.
(1) Set up a good record keeping system. At the very least, open up a different checking account. Deposit all business income into that account and pay all business expenses from that same account.
If you loan money to the business in the beginning (and you probably will), make a notation in the register that you’ve done so.
You’ll also probably donate items to the business like a personal computer, printer, fax machine, cell phone, office furniture and the like. Make a list of those items with their current fair market value. You can get that from Craig’s List or eBay. Then, pay yourself back from the company to create an audit trail.
(2) Set up a business structure. This will probably be the one you’re tempted to wait on. That’s because there is a cost associated with setting up an LLC (limited liability company) or a corporation. It’s also a bit of the “great unknown”.
There are three reasons to set up a business structure:
- Asset protection. Without a business structure, everything you have is it risk if something happens with the company.
- More tax. You pay self-employment tax of 15.3% on net income in a Sole Proprietorship (the default if you don’t have a business structure)
- More chance of audit. You have a staggering 1 in 3 chance of being audited with a Sole Proprietorship. Compare that to 1 in 100 chance of audit with a corporation and you’ll understand why so many people avoid a Sole Proprietorship at all costs.
(3) Find your hidden business deductions. For everything you spend money on, ask yourself: How could this be a write-off? Is it ordinary and necessary to the production of income?
Of course, not everything is a write-off, but I bet most small business owners leave thousands of dollars on the table by avoiding this step.
A small business can be a lot of work, but it also means freedom and control. And it means a whole lot less in taxes, if you do it right.