As a new business owner, it is normal to wear many hats. In other words, it is not uncommon to find an SME owner doing the accounting for their business. However, many business owners admit that the accounting process for their business is not their strongest point. This is why we have put together this list of the top accounting tips every new entrepreneur needs to know.
While the use of online accounting software for your business can make the process much simpler and easier for new business owners, it is still important for an entrepreneur to have a basic understanding of a few accounting principles when launching a business.
Open a Business Bank Account
Keeping your business and personal finances separate is important in keeping track of your business income and expenses. It also simplifies the annual/quarterly tax filing process. If you have a separate account for your business, you will not have to spend time going through individual transactions to classify them as a business or personal expense.
Start you business on the right track by having a separate business bank account from the onset. If you are wondering how to choose the best business bank account, consider factors such as bank location, account features for businesses, as well as service fees. Also ask if there are any limits on monthly or daily transactions. Lastly, be sure to check if your financial institution offers online or e-banking. This can make your life so much easier.
Understand Tax Implications of Your Business Structure
Your choice of business structure will determine whether your business will be eligible for any tax deductions come year-end. Small businesses can access tax deductions such as vehicle expenses, depreciation, and rent on business premises. On the other hand, C corporations benefit from a 21 percent corporate tax rate. Plus, with this structure you can carry profits/losses forward and backward.
Another good example is the tax filing deadline. For partnerships and limited liability companies (LLC), a March 16 tax deadline usually applies. However, sole proprietors have until April 15 to file their annual tax returns.
Your local state deadline will also vary for any state taxes. Understanding the tax implications of each business structure before you launch will also help you understand what your tax requirements will look like going forward. If you have questions about forming a business, such as how to set up an LLC, ask your accountant.
Understanding the tax implications of your business structure is definitely one of the top accounting tips.
Make Sure Your Record Keeping is Top Notch
The IRS recommends that small businesses keep their records for “as long as needed to prove the income or deductions on a tax return.” This usually means you should keep business records for 3 years from the date your return is filed.
However, businesses should also be able to distinguish any exemptions to this rule and keep business records for longer. For instance, if you omit income from your tax return and it totals to more than 25 percent of your reportable gross income, you must keep those records for at least 6 years.
Similarly, employment records of anyone working at the business should be kept for at least 4 years. However, most accountants will recommend that businesses stick to a 7-year rule for all records.
It is also important that small business owners get into the habit of practicing good record keeping from the inception of their business. This is by far one of the best accounting tips for start-up companies out there.
If you are unclear on what records you do need to keep, IRS Publication 538 lists them for you. Don’t forget to keep a fixed asset register. Most new businesses often keep records of their income and expenses but neglect to keep fixed asset documents. This will be important when it comes to calculating depreciation or writing up your balance sheet.
Determine State of Operation and Sales Tax Status
Income tax is not the only tax you can expect to pay as a new business. The location of your business will determine whether you will need to pay sales tax each year. Currently, 45 states have a sales tax of differing levels. Washington D.C. is part of this list.
Keep in mind that sales tax is a pass-through tax which means the customer essentially pays the sales tax, not the business. However, it is the business’s responsibility to collect the correct tax and submit it each year. If you find out you are must collect and submit sales tax, retaining a registered agent may be required. According to Northwest Registered Agent reviews, some of the things you should look out for when choosing a registered agent include any hidden fees, additional charges to scan your mail, and their reviews.
The sales tax rate will depend on your state and whether you are eligible for any local exemptions. For instance, states like Alabama and Alaska have sales tax holidays throughout the year. Your sales nexus will also determine whether you pay sales tax every year. Simply put, your sales nexus is your business’ connection to the state. If you sell products in a state, you are required to submit sales tax. If you do business in multiple states, you must check the nexus requirements in each state to see if your business qualifies.
Accounting Tips for New Entrepreneurs – Summary
Around 1 in 3 businesses spend over 40 hours a year preparing their federal taxes. The key to maintaining a robust accounting function in your business begins with the right accounting preparation from the beginning. As a new entrepreneur, knowing the basics of business accounting can help you get off to the right start.