How To Do Small Business Taxes — Melissa Joy Creative

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So here’s the deal. Small business owners wear a lot of hats, but the most confusing one is the tax hat. I found this one to be really hard to wear and the first year I had to submit taxes I was very stressed, but honestly as I expanded my record keeping it got easier and now it’s SO simple. However, before we get started I AM NOT A TAX PROFESSIONAL and I will not be held accountable to anything in this article. This is simply a tool to help YOU get your taxes done more easily.

WHAT I DID FIRST

The FIRST action I took for my small biz taxes was to get a CPA. She is another home-based business, but she is registered to compile taxes. Yes there is a fee for this and EVERY compiler is different, but it’s worth asking around and NEVER take anyone who cannot provide reviews or was not recommended. Now, to cut down on charges I give her a full list of all my tax info combined and she double checks it, does her paperwork and then lets me know if I paid enough in quarterlies or if I owe more. Some people I know take a ton of receipts into an office and lets the compiler do ALL the work and they pay much much more than I do.

Now, you may think, “I can just pay someone and make this go away - I’ll do that.” But that’s not exactly right. To even take receipts, files and more to that said office you have to collect them and even more so why make your business FINANCES someone else’s concern?!? The first time I took my stuff to my CPA I was a wreck - but an organized one and she told me something really important. (These were her words) “You thought you made a lot of money this year, but because you didn’t track everything and prepare and price accurately THROUGHOUT THE YEAR, your expenses outweighed your profit.” WELL, DAMN GIRL.

Do you know what happened next? I went home and cried. No really. I’m not proud, but I am honest. But then I bossed up and sat down and I took the next step. And you know what I did? I turned a profit that January more than I did the whole previous year. BECAUSE I TRACKED MY BUSINESS FINANCES.

LET’S REVIEW

Just to make sure we have our bases covered we are going to go over the basics of business finance and taxes.

-You need to have a separate bank account for business. This means a PayPal secondary account and a whole different bank account. You can transfer funds to and from this account to your personal, yes. However, all business-related purchases need to come FROM this account and all business-related credits need to go TO this account. This helps sort out what is business money and what is your money as well as saves your ass if you ever get audited or need a financial review to buy a house or something.

-You need to have some sort of record keeping. I have everything in a Google Drive because I can edit it, excel sheets math for me and if my house burns down I still have records.

-Taxes are a pretty simple concept. You make $A (gross), you spend $B (expenses), and that will leave you with $C (profit pre-taxed). Then you owe $D (state taxes) and $E (federal taxes) and then you are left with $F (take home).

$A - $B = $C, $C - ($D + $E) = $F

WHAT IS AN EXPENSE

This is what will SAVE YOU MONEY on taxes. If you have a business-related expense it is tax-deductible. Meaning the business money you made and then had to spend on a business-related expense will not be taxed. So if you made $100, but you had $55 in expenses you will only be taxed on $45. Easy right?

A LOT of things count as expenses and this is where it’s worth Googleing if you can count something as an expense so you can count it as one. But the rule of thumb is if it’s a business expense it’s tax-deductible. The only things that really break this rule are office space, your car, and travel, which I will get to in a minute. But examples of expenses are - shipping fees, credit card processing fees, boxes, project materials, a desk you work at, a printer to print labels, marketing fees, social media schedulers, website subscriptions, business insurance, etc. If you need to buy it for business it is an expense.

Now for the hard ones. If you drive for work you can’t typically write off the purchase of a whole car because you’ll also use that car for personal use so you write off the MILEAGE you drive for work. Every year the mileage rate will change so you need to look up what it is yearly and if you have a battery-run car I believe it is more. So say the rate is $0.50/ mile and you drive 5 miles to the post office every day you can write off $2.50 per day in mileage. If you happen to take a personal letter with you it doesn’t negate the fact you had to drive there for business anyway so it will still “count”. Same for a trip to the office store. Say you drive 10 miles to Staples and want to write off that trip to buy paper it will still count if you also buy some groceries next door and drive the paper and groceries home. See how you can really maximize this deduction? If you had to drive to the grocery store you would only count the 10 miles to Staples and the 10 miles back, however - you would not count the 4 you drove in between to get to Groceries R Us.

Office space works this same way. If you pay rent or mortgage its worth dividing up the square footage and see how much you pay per foot. then measure your office. Say your office takes up 10% of your home’s square footage and your rent/mortgage is $1000 - you could write off $100 per month IF AND ONLY IF you use that space SOLELY for business. If you don’t have an office and work all day on your couch you cannot write off the space your couch takes up. You can also do this same percentage for your utilities but your water bill is a little more difficult to figure out how much you use for business and well what is used for pleasure. However, I do have a friend that measured how much her toilet uses and every time a client is visiting and uses the restroom SHE DEDUCTS THE FLUSH!

Travel is the most complicating and you should really research this one on your own. But I clump this with eating out/ entertaining clients. So say you go to Utah for business. Your flight there and back is tax-deductible as well as your lodging because you had to go for work (count your rental car/ uber too if you needed one). Now say that you’re in Utah and you want to also go to Zion for an extra day - this extra day of lodging and expenses cannot be tax-deductible however it’s still worth doing because you've saved so much on the flight and paying that extra day out of pocket is worth it. Now say that you had a business meeting in the morning and you don’t fly out until that evening you can use that rental car or place of lodging for personal use because your main use for it was business. Entertaining clients work in the same aspect - sort of. If you pay for a client’s meal it’s entirely tax-deductible because you did it for business, but your meal is only deductible by half (if your salad was $20 you can write off $10) because in reality you still had to eat - but your business activity required you to eat here.

HOW DO I KEEP TRACK OF THIS

Remember how my tax lady made me cry? This is what I did next. I started keeping all of my financials on Google Drive excel sheets. The following are the sheets I keep for my small shops.

-Mileage. This one is simple. I have slots for the date, the round trip mileage, and the reason. Then I have an excel action on one box that keeps a running total for me. Then under it, I put the action in “=sum(G2*0.545)” which takes the box (G2) and multiplies it by this year’s current milage rate. This automatically converts my mileage into how much money that trip was.

-Expenses. Now your topics may look different than mine but basically, I just put my categories in and then I fill out the list as I go. This way I can have Excel total each category or the whole dang list. I use this list and the next both for expenses. However this sheet I fill out as soon as I make a business-related purchase.

-Consolidation. Now I do dropshipping as well as direct shipping so this is why I run an expense sheet and this sheet. I know what goes on each one but in reality, you can combine them. HOWEVER, I do this sheet MONTHLY on the first day of the month for the last month so I know how much money to set aside for taxes. So each of these boxes is filled out by the month. So for instance, I cut and sell decals. When I buy the vinyl it goes on the last sheet, but my sales for the month go here. I total the expenses from the last sheet (for THAT month only) and enter that info here. If you pay sales tax (talk with your CPA if you have your own site because Etsy does this for you in most cases and every state is different) you can include that here (it is neither profit nor expense you simply collect it and pass it along).

Now I fill mine out in colors to show credits and debits but I also have the last column tally for me with an Excel action to total it all. Then when this is done I can take that final profit number and multiply it by my tax rate and that’s how much money I’ll owe in taxes. You can pay by the year or quarterlies and it’s all dependant on your business (the rate is too) so you NEED to talk with a tax professional on this matter. THIS is the ONLY paper I print out and give my CPA at tax time to show my profit and losses for my business.

A FEW NOTES

This is simply how I keep track of everything. Since I do this monthly and pay myself at the end of the month it really helps me to know how much tax money I have to set aside and how much I can “take-home” by paying myself. Paying yourself also varies if you are a sole proprietor or an LLC - something else you need to talk with your CPA about. Again since I do this monthly I miss fewer expenses because I can remember the past month as opposed to the whole year. If I want to double-check I can refer to a statement from that business only back account I have too. When I’m done December on January 1st I’M DONE MY TAXES! I hope this helped put taxes into perspective!

PS - I also still save my receipts and statements with these excel sheets stapled to the front of them so I’m ready if I do ever get audited.