A question that I frequently get from entrepreneurs is this: What can I do to reduce my tax liability? Fortunately, it’s a pretty simple answer.
The most important step in successful tax planning is keeping up with your record keeping on a monthly basis. Not the answer you wanted, is it?
But it is essential to have a system in place to track your income and expenses month to month. You can do it on your own with a simple spreadsheet or bookkeeping software, or you can outsource it to a bookkeeping firm like us. At the end of the day, the most important thing is that you have a system in place that is consistent and accurate!
In addition, all expenses should be properly classified into categories, such as advertising, repairs, meals, travel, etc. Not only will this help with your tax planning; it will help you evaluate where you are spending your money and if the business strategy you have in place is working. It’s also important to note that some business-related expenses can’t be written-off for tax purposes.
For example, you can’t write off entertainment expenses even when they are for your business. You also can’t always fully write off large asset purchases, such as vehicles and equipment, because they need to be depreciated. Regular clothing- like a suit- can’t be deducted either, even if you wear it on the job.
On the other hand, you could be missing out on a significant amount of “personal” expenses that can be written-off through your business. Home office, mileage, trainings/events, etc… can all be deducted.
After you have a great bookkeeping system in place, you’ll be able to implement some more advanced tax strategies to help you reduce your tax liability.
Moral of the story: it’s super important to put monthly bookkeeping on your to do list! If you’d rather focus on running and growing your business and let someone handle the numbers, hire a bookkeeping firm to take care of it for you.
