Here I am investing in myself
Before you took the courageous leap into the world of self-employment and merely reported in to “The Company”, you probably didn’t give much thought to your home internet connection other than to bemoan its rising cost and decreasing speed. But now that you are on your own as an entrepreneur, that Fios bill is part of the cost of doing business and one the government wants you to deduct from what you pay in taxes.
You don’t need a degree in accounting to know that your cable bill, phone bill and office supplies are allowable deductions, but there are a number of potentially more valuable deductions available to you if you can migrate your thinking from “self-employed worker” to business owner.
You may be working at home in sweatpants, but you my friend are the company in the eyes of the government. And when it comes to filing a tax return, you are essentially preparing a form (Schedule C) which mimics a business tax return -- and businesses invest in themselves. You’re an entrepreneur and you want to pay as little tax as possible so you can use those tax savings to invest in the growth potential of your business.
Tax laws are set up to encourage entrepreneurs. That above all is important to remember.
If you rent an apartment and you have to pay a Comcast bill, the government says, “We think it’s a good idea for you to deduct the business portion of those expenses from your earnings.”
Because the laws are set up to incentivize you to start a business, you can deduct the tools you need to perform your work. That might be a large format plotter or a 3-D printer or an 18 volt screw gun with rechargeable battery. Hardware purchases like these are an investment to grow your business. You need a computer. It may not even be entirely for work but as long as it has some business use, you could deduct a portion of the computer’s cost from your income -- a perk you now enjoy thanks to your new status as a business owner.
And guess what? This perk isn’t limited to smaller expenses. Major expenses like your automobile may provide you -- the self-employed -- with additional opportunities to deduct the costs of purchase from your taxable income. For many entrepreneurs, a car is now more than convenience, but a necessary tool to conduct business.
The tax law rewards the “spend money to make money” principle. Let’s face it - the government wants you to succeed. If they get a cut of your profits, their cut is larger when your profits go up. That’s how the mafia- er, I mean, the IRS, works.
Get rewarded for your risk
The government gives you benefits for taking that risk of going out on your own, and thanks to the tax code: Everything now becomes an opportunity.
Let’s say your bakery is growing and requires additional resources to deliver all your delicious, new-year’s diet killing treats around the city. You have a couple of options - you can negotiate a contract with a delivery service to outsource this process (might not be a bad business decision) and deduct the delivery costs from the additional revenue you bring in. Or maybe you want to deliver the full service - from delicious breads to prompt customer service - and you purchase a new van and hire a driver. The IRS also allows you to deduct these costs as well! Suffice to say, in order for you to grow your business, you have to take on a little risk (enter into a delivery contract or purchase a van) and the IRS says - “Good for you - we’ll leave this fat little deduction for you by the door”...it’s up to you to both consider the investment and properly report it!
Invest in your learning
Apply your new “everything is an opportunity” motto to your training, networking and continuing ed, too. Whether you’re learning a new skill like coding or getting marketing tips at a conference, the money you’re spending is an investment in your business and a deductible expense.
Let’s go with skills development. If you’re dreaming of taking a coding bootcamp but shying away because the fee is $10,000, stop for a minute -- the cost is actually much lower when it’s a business investment. Since the IRS allows you to deduct the $10,000 from your income, you are reducing your taxable income and ultimately your overall tax. Assuming you pay a total tax rate of 30% (between Federal and State), that would be tax savings of $3,000 on your initial $10,000 cost. That coding bootcamp didn’t cost you $10,000...it cost you $7,000!
And if it results in an increase in your business, you can easily determine the return on your investment by dividing the return (how much more you end up making) by the cost of the investment ($7,000 after tax cost in this case). If the bootcamp results in you making an extra $3,000 a year, well the $10,000 you plopped down in the beginning provided you with a 43% return! Good luck finding that in the stock market.
Take charge of your books
One of the benefits of working for someone else’s company is that they bear the risk. Another benefit is that they do the hard accounting for you. Every January, they assume responsibility for calculating and providing you (through a W2) a summary of your income, tax withholdings, retirement contributions and other workplace dues such as health insurance.
When you’re self-employed, the onus is on you to keep track of all the numbers which means a lot more record keeping for you. Remember, you are the company.
Too often, entrepreneurs to do their record keeping last minute which can lead to missed opportunities.
Let’s say you incurred $80,000 in expenses to run your business and your net revenue is $120,000. But because of poor record keeping you’re missing $10,000 in expenses. That miss means you are paying tax on $10,000 that you shouldn’t be! You would probably end up owing $3,000 in taxes on what really wasn’t income in the first place. That’s money you’re entitled to but because of bad recordkeeping, you’re essentially gifting to the IRS. What could your business do with an extra $3,000?
The solution to this problem is to set up a system of internal record keeping that works so well for you that you attend to it regularly.
Make it is as easy as checking Instagram
You may have fallen into a pattern of the yearly April scramble. No more. Record keeping once a year is unacceptable. Set up a kinder, more profitable record-keeping schedule for yourself -- say once a month. If you set aside even three hours once a month, you will have a better chance of effectively capturing all your income and expenses. Set up a time in your calendar to review your books and follow it up with a reward to incentivize yourself. For me, that would be cutting out of work early that day to go for a hike with my dog. Otherwise, if you loathe doing the books and records, it might make sense to hire a bookkeeper part-time to help you out (yes, their fees are tax-deductible!).
If you’re the typical entrepreneur (especially one who works remotely) there isn’t anything you do without your phone, so I recommend that my clients find a mobile app that helps them manage their expenses on the fly. Expensify is a good one.
Similar to Mint you can use it to categorize and track expenses. It imports expenses directly from a credit card to create free expense reports quickly. You can also scan your receipts with your phone and if you have employees they can use it too, and get instantly reimbursed for pre-approved expenses.
Separate your personal and business money
If you are self-employed, it’s crucial to separate your business and personal bank and credit card accounts.
There are many reasons to do this, but the first is that it just makes good business sense to separate your personal finances from that of your company. Since the IRS requires you to keep good books and records, this will be hard to do if you have your new 3D Printer on the same monthly statement as your trips to the spa. Make it easy on yourself - put all of your business expenses on your business credit card to keep your books in line. (Just make sure you save your paper receipts in an envelope in case you are ever audited.)
One of the best ways you as a self-employed worker-slash-entrepreneur-slash-business owner can increase your profits is to reorder your thinking to see every expense as an opportunity to invest in your business (and therefore pay less to the government).
This new mindset will help you pocket more money and you’ll have more fun investing in growing your baby. It will also help you squash that pang of angst you get when you spend what seems like big money on training, equipment or travel. Eventually, you’ll bump up against a limit to the deductions you can claim, so to get the most tax benefit it makes sense to talk to an accountant and a financial life guide who can holistically evaluate your business and personal financial lives. Together, they can tap deductions you’ve never heard of and move you toward your larger life and business goals.
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