4 Solutions for Common Small-Business Money Mistakes
Tax season may not be your favorite time of year, but it can provide a catalyst for identifying and addressing any financial missteps you’ve taken over the past year.
Here are four common financial mistakes that small-business owners make — and some expert advice for correcting them. Making some adjustments can improve your business practices and, in some cases, ease your tax burden.
1. Focus on building your business credit. Just as it takes time and effort to establish your personal credit history to secure lower-interest credit cards and loans, you need to intentionally establish a credit history for your business.
Carlos Gomez, managing director at Provident Dedicated Services, explains that the better your business’s credit history is, the less you’ll have to involve personal assets in any type of business loan — and the less you’ll pay to secure the financing.
To get started, Gomez recommends setting up small-business credit accounts with your existing vendors (such as Office Depot or Staples). He says that after using those accounts responsibly for about six months, you should have some credit history established. After that, you can move on to securing a small-business credit card and eventually, larger loans or lines of credit.
2. Make sure your retirement plan still fits. Wayne Bland, owner of Bland Retirement Services, recommends that small-business owners check in with their retirement plan at least every three years to ensure the account type is still the most appropriate choice.
For example, if you’ve already established a SEP-IRA, it may behoove you to establish a 401(k) in 2014, terminate the SEP, and facilitate a tax-free rollover from the SEP into the newly formed 401(k). This will ensure that you have access to cash flow during a bad business cycle, he explains.
“A SEP-IRA (or any IRA) doesn’t have loan provisions, but a 401(k) can have the loan option feature if you or employees really need it,” Bland says. Because a SEP-IRA is 100 percent vested from the moment the contribution is made, an employee can walk away and take their SEP at anytime, he adds. “A 401(k) has a vesting schedule, which is an encouragement for your employees to stick around.”
3. Don’t leave deductions on the table because of a lost receipt. William Olsen, CPA and co-founder of deduction-tracking software provider Deductr, says that for cash expenses, a receipt to back up your deduction is an absolute necessity. But in all other cases except lodging, receipts are not necessary for expenses of less than $75 (however, they are still the best verification of deductions).
“Monthly bank and credit card statements become a secondary source for expense verification. Use them to identify expenses you have had either one time or on a regular basis,” Olsen advises.
Additionally, don’t neglect claiming legitimate business miles traveled just because you didn’t log the start and end of every trip. “The only time you need to log the odometer reading is at the end of the year,” Olsen says. “To verify your odometer reading, find a car service receipt as close to Jan. 1 as possible. Your receipt of the service performed will have an odometer reading on it and can help you determine your ending/beginning odometer reading.”
4. Make estimated tax payments less painful. Making estimated tax payments is a reality of owning a business. But attorney Patrick Sheehan of Patrick T. Sheehan & Associates says you can make the payments less daunting by opening a separate bank account that’s dedicated to taxes.
“Put a percentage of your income into the tax account each time you are paid [usually 25 to 30 percent] to make provision for your estimated tax payments,” Sheehan recommends. “It’s much easier to set aside small amounts on a regular basis than to have to make a huge payment on a quarterly or annual basis.”
Stephanie Taylor Christensen is a former financial services marketer who brings more than a decade of experience in marketing and writing to her career as a full-time freelance writer and small business owner.