Starting a new business? This suggestion: Keep your small business accounting and your taxes simple. Really simple. The reason? In the post-pandemic era, small businesses, especially new ones, struggle to find good CPAs and good CPA firms. Ditto for bookkeeping help.
And how do you do this? Consider the following six hacks to simplify your small business accounting and taxes:
Operate Sole Proprietorship
You can operate a business using a variety of entities: sole proprietorship, corporation, partnership, and so on.
But to keep things simplest? At least in the beginning? Use a sole proprietorship. That simplifies your accounting. (You’ll only need a profit and loss statement.) And it simplifies your taxes. (You’ll just report your income on a Schedule C form inside your regular individual income tax return.)
Use Limited Liability Company
Concerned about your legal liability? Tempted to incorporate? Maybe reconsider that.
You should be able to form a limited liability company, or LLC. And if the LLC has a single owner—called a member—you’ll get to use the sole proprietorship entity classification. Even though you’ve limited your liability risks.
Note: We give away free copies of do-it-yourself kits for forming LLCs for most states.
Go with Cash Basis Accounting
Here’s another tactic. Keep your bookkeeping simple by using cash basis accounting. Count income when you receive payments, for example. And count expenses when you make payments.
The alternative to cash balance accounting? Accrual accounting. But accrual accounting greatly complicates your work.
Use Equity Not Debt
Your capital structure will either make your accounting and bookkeeping harder or easier.
But one thing you can do to keep things easier? Use owners equity to fund the business. In other words, don’t use a bunch of debt to fund the business. Or parts of the business.
Leveraging up your small business with debt obviously increases your financial risks. But even beyond that? It makes your accounting way too complicated.
Keep Balance Sheet Sparse
A related suggestion? Keep your balance sheet lean. Clean. As sparse as you can.
So of course your balance will show cash. Maybe some inventory. But anything else? Try to avoid that.
If you avoid debt, that of course keeps your balance sheet lean and clean.
And then the other thing to do: Don’t put a bunch of assets onto the balance sheet. Write off as supplies anything that costs $2500 or less. Or that probably lasts less than a year.(See this blog post for more information: Tangential Property Regulations.)
And then, sorry, don’t buy vehicles and put them onto the balance sheet. Or anything that IRS considered a so-called “listed asset” which triggers extra reporting. (Cars are listed assets. And so is other stuff that’s likely to be used personally.)
Use a SEP as Pension Option
The easiest pension option? Just skip a formal pension and use an Individual Retirement Account. Maybe one for your spouse, too, if you’re married.
If you want to put bigger numbers onto your return, look at using a SEP-IRA plan. That’ll let you contribute up to 20 percent (roughly) of your business profit up to about $60,000 a year. (The limit in 2022 is $61,000 but that limit gets adjusted for inflation.)
With a SEP-IRA? You just shuffle some paperwork. And then sometime before the tax return filing, decide whether or not you want to contribute to the SEP-IRA account.
When or if you hire employees? Outsource the payroll. Do not do this yourself. Or even a worse idea do this for your spouse’s business.
You can outsource payroll to someone like Gusto.com. Pay a few hundred bucks a year. And get all your payroll taken care of: quarterly returns, tax deposits, W-2s and so on.
Shoulder Season Scheduling
A final idea: If you do need help from a CPA or bookkeeper?
Well, first, don’t wait until the last minute. Terrible labor shortages exist in the world of accounting right now. And that will probably continue, especially for CPAs, for years. (It takes about five years to get the schooling necessary to become a CPA. And it probably takes another five years to really know how to do the job.)
And then if you can, try to schedule your work outside of tax season. Schedule your working with CPAs and bookkeepers in the shoulder season that falls between April 15 and the fall extended tax return season.
Thanks a lot. But what if I am looking to maximize my small business earnings should I do?
Stephen Nelson CPA says
Not to sound corny but if you grow your small business, you should really grow your profits.
The trick, I think is to not let complexity and its costs overwhelm in the beginning… and to just keep growing, growing, growing.
BTW, the “Human Capitalists…” blog post I did a while back, I pointed to and discussed the surprising incomes and wealth building that come from owning a good small business.