5 Common Tax Deductions that Small Business Owners Often Overlook

They say that only two things are certain in life: death and taxes. Paying tax is inevitable but there are things you can do to reduce the percentage of your income that the taxman takes. As a small business owner, the likelihood is that you’re probably paying too much tax, which is why we’ve put together a list of the most overlooked deductions to help you reduce your bill.

Of course, in order to claim the following tax deductions, you need to be on top of your bookkeeping. Get into the habit of updating your records and file all of your receipts and invoices in a well-organised system.

1. Startup Expenses

Money is usually tight during the startup phase and every penny counts, but many small business owners overlook startup costs. Don’t assume that it’s too late to claim, either; in the UK, for example, limited companies can claim relevant startup expenses for up to seven years before the business officially begins operations. Just because you’ve been in business for a few years doesn’t necessarily mean that you’ve missed the boat.

2. Home Office Expenses

If a room in your home functions as your primary place of business then you may be able to claim a home office deduction. Expenses such as gas, internet and electricity will usually be deductible based on the percentage of your home used for work, and for how long. Therefore, it’s important to keep a record of how many hours you work each month in order to calculate this deduction.

You will also be able to claim expenses such as office furniture, although again you will have to calculate the usage portions. If you buy an office chair for £100 and use it exclusively for work, then you can claim the full amount. However, if you use it for personal reasons 30% of the time then you will only be able to deduct £70 from your taxable income.

3. Carryovers

Business owners often overlook capital and net operating losses as tax deductions. It’s possible to carry these losses over into future tax years to reduce taxable income. With so many small businesses suffering due to the covid-19 pandemic, this is definitely a deduction to make note of. Carryovers can be used to reduce either the business’ or the owner’s income. It’s best to speak to your accountant about how your business can best benefit from this type of tax deduction. 

4. Losses on Bad Debts

If your business loses money due to a customer who won’t pay, an employee who quit after receiving advance wages or loans to clients that your business is now unable to collect then you may be able to claim this amount as a tax deduction. You will have to prove that you have taken reasonable steps to collect this amount but have been unable to do so. Of course, this situation is less than ideal but it may help to soften the impact of a bad debt.

5. Education and Training

It’s a good idea to invest in your employees and you should be able to deduct the cost of doing so. Many business owners overlook the fact that educating and training their employees is a deductible tax expense, so keep a careful record of your spending in this area to receive a smaller tax bill.

Summary

We would all like a smaller tax bill, so be aware of these often overlooked deductions to ensure that you don’t end up paying more than necessary. It’s important to keep a careful track of all of your expenses so that you don’t miss out on any potential tax deductions. If you’re unsure about whether an item qualifies for tax deductions, be sure to speak to your accountant or bookkeeper so that you don’t end up making a costly mistake.

5 Easy Tips for Managing Expenses as a Small Business Owner

As a small business owner, it’s crucial that you manage your expenses well. In fact, Fundera found that 20% of all small businesses fail within the first year, so it’s vital that you develop good money management habits right from the very beginning. Small businesses tend to have smaller profit margins, so it’s essential to keep careful control of your costs. Here are five easy tips on how to better manage your expenses so that you can maximise your margins.

1. Start Immediately

The majority of businesses incur costs before they officially launch. It’s important to keep a careful track of your expenses before you even open your doors, be they virtual or physical. Even the smallest costs can really add up over time! No business owner wants to pay more tax than strictly necessary, so set yourself in good stead by carefully recording your expenses right from day one.

2. Open a Separate Business Bank Account

Opening a separate business bank account makes it infinitely easier to keep track of your spending because it avoids the risk of confusing business and personal transactions. You cannot claim personal expenses as business costs, and such a mistake on your tax return could result in a significant penalty. Furthermore, having a separate business account ensures that you won’t overlook any transactions and end up paying more tax than you should.

3. Use Accounting Software

Online accounting software makes it easier to manage your spending. Many programs allow you to upload pictures of your receipts and invoices and then organise them accordingly. This will save you a lot of time and prevent you having to manage a mammoth backlog of records all at once.

Furthermore, accounting software will provide you with a clear picture of your spending and even allow you to understand which costs generate the most significant return on investment. This is actionable data that will allow you to cut costs where necessary and focus more on profit-generating activities.

4. Create a Clear Budget

Creating a realistic business budget that you can actually stick to is an important step in managing your expenditure. You will then be able to monitor your performance against this budget and adjust it when necessary.

In order to create a realistic business budget, you must first calculate your income, then determine your costs and work out your profit from these figures. This will tell you how much you can afford to spend and allow you to set a cap on your expenditure. Be sure to review and update your business budget regularly; an outdated budget is of no use to anyone.

5. Take the ‘Little and Often’ Approach

Let’s be honest: as a small business owner, bookkeeping is unlikely to be your favourite task. Treat it like a household chore and take the ‘little and often’ approach. Spend a little time each day or week to record your expenses and measure them against your business budget. This will give you an accurate idea of what you’re spending right now and allow you to fix any potential problems before they spiral out of control.

Summary

Conscientiousness is the key to prudent expense management as a small business owner. By being proactive about bookkeeping from the very beginning of your business, you will find it much easier to manage your spending. A clear understanding of where your money is going is crucial if you want to cut costs. Furthermore, by creating a realistic business budget, you effectively devise a roadmap for spending that will make it far easier to make smart decisions when it comes to expenses.

5 Common Bookkeeping Mistakes That Can Break your Business

Running a business is hugely fulfilling… and often, very stressful. It takes a lot of hard work to get your business off the ground but it’s worth it to be your own boss and dedicate your professional life to something that you’re truly passionate about. However, there’s one part of running a business that the majority of entrepreneurs dislike: bookkeeping.

Unless you’re a professional bookkeeper, the chances are that you find bookkeeping overly complex and rather tedious. However, good bookkeeping is vital to the financial health of your business and getting it wrong can have disastrous consequences. Let’s take a look at the five most common bookkeeping mistakes that can threaten – or even break – your business.

1. Failing to Include Bookkeeping in Your Business Plan

As we said above, bookkeeping is unlikely to be the area of your business that you’re most excited about. However, failing to account for bookkeeping in your business plan is a big mistake. Your business plan lays the foundation for your future success and it’s important to have a solid plan in place before steamrolling ahead.

Be sure to include your financial goals and bookkeeping processes in your business plan. Make sure that you are clear on who is in charge of each financial deliverable and create a bookkeeping schedule. Many entrepreneurs get swept up in the excitement of their new venture and put bookkeeping off until later, which is a big mistake. Staying on top of bookkeeping is essential to ensure that your company stays in good financial health, so make a schedule that you can stick to.

2. Poor Organisation

Bookkeeping is difficult enough, so don’t make it worse by failing to properly organise your invoices and receipts. It’s worth taking time to set up a clear organisational system to follow so that you don’t find yourself buried under a mountain of muddled documents later on. Cloud-based bookkeeping software can be very helpful for this, as you can upload pictures of your receipts from your smartphone and the program will automatically organise them for you. This also ensures that you don’t lose any receipts and end up paying more tax than necessary.

3. Mixing Business and Personal Bank Accounts

Doing business with your personal bank account is a surefire way to muddle your records and enter mistakes on your tax return. It’s important to create a separate business bank account as soon as possible to ensure that your business and personal transactions stay separate. Otherwise, it can be very difficult – not to mention time-consuming – to remember which purchases were business expenses and which were personal. This may lead you to missing out on tax deductions or mistakenly entering personal items on your tax return, which could lead to penalties.

4. Neglecting and Misusing Petty Cash

Many business owners neglect to file petty cash, which can result in an incorrect tax bill, and even fines. Furthermore, some business owners think of petty cash as free money, or their personal wallet. Whilst petty cash is certainly convenient, remember that the money still belongs to the business and that these transactions need to be tracked.

5. Failing to Classify Employees

It’s important to properly classify your employees and keep track of their employment status to avoid confusion when it comes to filing your tax return. There are three main types of employees that most businesses have on their payroll:

  • Full-time
  • Part-time
  • Independent contractors

Summary

You worked hard to launch your business, so don’t jeopardise the financial health of your company by making the above bookkeeping mistakes. However, bookkeeping can certainly be a demanding job and it only grows more so as your business expands. Therefore, if you’re struggling to stay on top of bookkeeping, it may also be time to consider hiring the services of a professional bookkeeper to make sure that you stay on track for financial success. 

4 Reasons Not to DIY Your Tax Return For Your Small Business

As a small business owner, you may be used to taking the DIY approach. After all, you’re most likely a marketer, financial director, HR manager and payroll administrator, to name but a few of your many responsibilities. However, although your business may be small, there’s one area that really does call for professional help – and that’s filing your tax return. Let’s take a look at four of the main reasons you shouldn’t do your taxes yourself this season.

1. You’re Not a Numbers Person

We’d all like to believe that we’re good at absolutely everything, but the truth is that not everyone is good with numbers. If you don’t have an affinity for mathematics then doing your taxes yourself is probably not the best idea.

Even if you’re competent enough at everyday calculations, taxes are a whole different ball game. Calculating your taxes is a very complex process; there’s a reason that bookkeepers & chartered accountants have to spend so many years in training.

A simple mistake on your tax return can cause you to pay the wrong amount of tax and even result in harsh penalties that can seriously threaten your small business. It really isn’t worth the risk.

2. It’s a Waste of Your Time

Taxes are notoriously time-consuming and as a busy business owner, your time is a precious resource that you can ill-afford to waste. After all, the time that you spend doing your taxes is time you can’t spend growing your business. It’s important to sit down and think about how much your time is actually worth before you squander it all trying to figure out your taxes. Think of time in the same way as you think of money, and learn to invest it wisely.

3. Tax Laws Change Constantly

Tax laws change all the time and it can be incredibly difficult to stay on top of all the latest rules and regulations – especially when you already have a business to run. When tax season rolls around, the chances are you won’t know about all of the latest changes which could lead to you making mistakes on your tax return or missing out on new opportunities to save money.

It’s a bookkeepers or accountant’s job to keep up to date on any changes and then take advantage of these opportunities to save you money, so that you pocket as much of your income as possible. Remember that a quality accountant will always save you more than their wages.

4. The Internet is Full of Misinformation

In this day and age, the DIY approach to any task usually involves several Google searches. The problem is that although the internet is a wonderful resource, it’s full of incorrect or outdated information. As discussed, tax laws and deductions change all the time, so the article you’re reading may no longer be accurate. Furthermore, tax rules vary hugely from country to country, so you might end up making a mistake because you read advice that doesn’t apply to your business.

Sifting through all of this information and checking for veracity is a hugely time-consuming task, so you’re far better off working with a tax professional who has relevant experience within your specific industry. That way, you can have your questions immediately answered by someone who knows what they’re talking about and won’t have to waste time falling down Google rabbit holes.

Summary

The needs of every business are different, but if the above issues resonate with you then you should consider hiring an accountant when tax season rolls around. A great bookkeeper or accountant is an investment in the financial health of your business, and will undoubtedly save you a significant amount of time, money and stress in the long run.

7 Reasons to Use Online Accounting Software

The days of pencils and paper are over. Almost everything is done online now, and accounting is no exception. Online accounting software has a number of benefits for your business and you should set it up as soon as possible to set yourself in good stead for financial success. Many people debate the benefits of accounting software vs human accountants but it’s actually helpful to use both. Here’s how online accounting software can benefit your business.

1. It’s Easy to Use

One of the biggest benefits of online accounting software is that it’s easy to learn and use. You don’t have to come up with an organisational system yourself and you can keep your accounts up to date by making a few regular entries. Make a habit of entering your bank statements, expenses and invoices and the rest will be taken care of.

2. It’s Cost-Effective

Accounting software saves a lot of time and as the saying goes, time is money. Online software allows both you and your human accountant to access and review your accountants at the same time, saving a significant amount of back-and-forth communication. What’s more is that this type of software is generally billed monthly so you know exactly how much you’ll have to pay and when. Regularly paying a smaller fee is a lot more beneficial for cash flow than shelling out a large lump sum.

3. Seamless Invoicing

Invoicing errors can be costly but sometimes it’s difficult to keep track of everything at once. Accounting software allows you to stay on top of your invoices and remain aware of who owes what and when. You can even opt to be alerted when invoices are overdue, allowing you to take care of any problems quickly and efficiently.

4. Cash Flow Projections

Managing your cash flow well is essential to the financial health of your business; in fact, some would argue that cash flow is even more important than profit. Online accounting software creates forecasts for profits, losses and cash flow which can really help you to make informed financial decisions and prevent any nasty surprises. Cash flow problems can be really damaging or even fatal to your business, so these projections are incredibly valuable for effective money management.

5. Productivity

Paperwork and productivity don’t always go together. If you and your employees are consumed with dull paperwork, you’re more likely to lose motivation and get distracted. Online accounting software dramatically reduces paperwork through automated processes, which cuts down on man hours and allows you to put your time and effort to better use.

6. Accuracy

Human error is the leading cause of accounting mistakes. Miscalculations often lead to wasted time, a lot of stress and significant expense. By automating calculations and accounting processes, online software can help you to avoid costly mistakes and ensure that your data is accurate. In turn, this enables your human accountant to provide valuable insights into how to practice smarter spending and improve the financial health of your business.

7. Flexibility

Freedom and flexibility are often cited as key reasons why people start their own businesses, so you want accounting software that can help you to reach that goal. Online accounting software allows you to manage your accounts from anywhere in the world, so long as you have an internet connection. It also gives your accountant far easier access to your information, allowing you to consult virtually rather than face-to-face. Online accounting software allows you to stay on top of your accounts at all times, giving you far greater flexibility and freedom.

Summary

Online accounting software has a myriad of benefits for the financial health of your business. This software not only saves time, money and stress but it also allows businesses to operate with more flexibility. Lately, remote working has become the norm and so it makes sense to adjust your accounting processes in line with this shift.

Please contact me to find out more. All my bookkeeping packages include the cost of software.

The Accounting Trends You Need to Know About in 2021

As a business owner, it’s important to stay on top of accounting trends and make them work for your business. If you don’t stay up to date you might just find yourself left in the dust whilst your competitors improve their efficiency with the latest and greatest software and practices. Here is an overview of the top accounting trends for 2021 to help you stay one step ahead.

1. Accounting Software Solutions

In recent years, there has been a surge in accounting software solutions. By now, most industries are harnessing the power of the digital world and accountancy is no different. There are more demands than ever for computerised accounting and software companies are working hard to ensure that manual tasks are kept to a minimum. Pens and paper really are things of the past.

2. Cloud-Based Accounting

Everything is in the cloud these days: your photos, your music and even your passwords are stored in the cloud, so why not your accounts, too? Cloud-based accounting is both cost and time effective. In fact, around two thirds of accountants believe that it will prove beneficial to their work.

One big benefit of cloud-based accounting software is that it enables you and your team to access and update your numbers anytime, anywhere and crucially, all at once. Collaboration is easier than ever and there is no need for constant backups and email exchanges. Speaking of backups, cloud-based accounting software ensures your data is stored securely with military-grade encryption that certainly beats a USB stick.

3. Automated Accounting

Automated accounting processes save time, money and, perhaps most crucially, error. More companies than ever are investing in automated accounting processes because it can prove very lucrative for businesses. Beyond that, it also increases companies’ ability to make data-driven decisions and allows them to do so faster than ever before.

However, there is a downside to automated accounting. Like any process that relies on technology, it comes with a cybersecurity risk that must be properly assessed and continuously monitored.

4. Work-Life Balance

Another benefit of the surge in automated processes and cloud-based software is that more accountants & bookkeepers than ever are able to work from anywhere, at any time, promoting a greater work-life balance. These developments also save a lot of time in email exchanges and backups, leaving accountants & bookkeepers with more moments to enjoy.

5. Accountants Are Becoming Advisors

There’s always been some overlap between chartered accountants and financial advisors but now the accounting industry is increasingly focusing on data analytics, and so many accountants are shifting into more advisory roles. Developments in accounting technology allow accountants to offer more accurate insights and provide their clients with valuable advice. In fact, harnessing the power of technology to provide business advice is one way accountants can ensure they’re not eventually replaced by machines.

6. Social Media

Accountancy and social media may seem like strange bedfellows, but networking is important to any business. The coronavirus pandemic meant that even the staunchest of luddites had to resort to platforms such as Facebook and LinkedIn in order to interact with their peers and prospective clients. There’s no denying that social media platforms allow accounting firms to build a brand, drive more traffic to their website and make new connections. These channels are a powerful marketing tool for any business and accountancy is no exception, so it’s high time for the industry to catch up.

Summary

As you can see, advancements in technology are driving a lot of change in the world of accounting – mostly for the better. This means you can look forward to more effective and efficient accountancy, as well as the ability to make smart business decisions based on optimised financial data. Here’s to 2021!