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Established Community Backer ***

Three Tips from Two Accountants Who Know How to Manage Expenses

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We know managing expenses may not be your absolute favorite task of the week (or the month … or the year … ). We also know having your books in order helps you cut business costs, lower your tax bill and put more money in your pocket in the long run. In other words, carefully and regularly managing your expenses throughout the year is really, really important.

 

That’s why we’ve asked two accounting whizzes to help us understand how to track expenses without hassle or heartache – and save gobs of money to boot. Robert Stewart and Ryan Walsh are both self-employed accountants who specialize in helping people who work for themselves. Ready? Here we go!

 

Tip #1: Embrace accuracy

 

The single most important part of managing your expenses is knowing exactly where all your money is. Whether you manage your own expenses or rely on a professional accountant, your books should be 100% up-to-date to generate an accurate Profit and Loss (P&L) or Balance Sheet.

 

Ryan Walsh recommends sitting down at least once a month to focus on your money matters.

 

“Planning,” says Ryan, “is definitely your friend.”

 

Specifically, you consistently should be:

 

  • Tracking financial activity including all bank accounts, credit cards and loans
  • Reconciling monthly statements
  • Collecting and verifying W-9s from contractors and vendors eligible for 1099s (1099s are required when payments to an unincorporated business total $10 or more in gross royalties or $600 or more in rents, lawyer fees or compensation)
  • Collecting and verifying W4s from employees

 

Robert Stewart shares this tip for making sure you’ve got your documents on hand.

 

“For employees and 1099 vendors, consider withholding payment until the necessary paperwork is completed and submitted.”

 

You can find out more about your local tax requirements by checking online for your state’s revenue department (for income taxes) and labor department (for employment taxes).

 

Another suggestion: Pay particular attention to payroll.

 

Robert says small business owners who hire employees or subcontractors often get confused about properly managing payroll. Such transactions tend to be a little more complicated, and it’s easy to lose track of the sometimes-confusing logistics around payroll entries and updates.

 

“Payroll is where we see the most mistakes,” says Robert – mistakes which can be costly down the road in terms of tax penalties and interest.

 

Tip #2: Write-off expenses

 

Often, when it comes to smart business spending, timing is everything. While he would never endorse unnecessary purchases solely for the sake of a tax break, Robert makes this point:

 

“Small business owners should think about expenses they have coming up and, cash-flow willing, make as many of those necessary purchases before December in order to deduct the cost in the current tax year.”

 

Tip #3: Make your business official

 

If you're a sole proprietor, you may have debated whether or not to form an LLC or corporation. Specifically, you may have wondered if changing the official status of your business is a smart financial move.

 

The short answer? It is.

 

“We feel that you should form a business right away,” says Ryan. “Forming a company offers you personal asset protection, perpetual existence and tax flexibility, to name just a few benefits.”

 

Robert wholeheartedly agrees, pointing out that in most states, forming a business costs less than $1,000. He considers that a relatively small investment. Once your business is incorporated, he says:

 

“You can elect for Small Business Corporation (S-Corp) tax status. Compared with a sole-proprietor or partnership, the average S-Corp owner saves $1,000 to $1,200 on every $10,000 of profit.”

 

By this estimation, the cost of forming an LLC is far outweighed by the tax savings you’ll likely enjoy each year.

 

Before you go

 

QB Community members, what are *your* top tips for tracking your business expenses? 

 

 

10 Comments
Established Community Backer *

Re: Three Tips from Two Accountants Who Know How to Manage Expenses

I appreciate the idea of putting it into a real value for whether or not to file as an LLC or stay a sole proprietor. That is really helpful for people on the fence. 

Established Community Backer ***

Re: Three Tips from Two Accountants Who Know How to Manage Expenses


Adam_Fenner wrote:

I appreciate the idea of putting it into a real value for whether or not to file as an LLC or stay a sole proprietor. That is really helpful for people on the fence. 


I fail to understand this point at all.

 

An LLC is nothing more than a state registration that provides the company with legal protection, isolating your personal assets from a judgement.  It is not a business type.

 

Any sole proprietor or partnership can be an LLC and it changes nothing.  Some states even allow an s-corp to file for LLC, even though the s-corp already provdes that personal asset protection.

 

in reference to the original article ....

I ran the numbers for my partnership, and the statement that you save money as an s-corp is just not true as a blanket all encompassing rule.

 

 

Established Community Backer ***

Re: Three Tips from Two Accountants Who Know How to Manage Expenses

Controlling expense is a favorite of mine, from a business owners perspetive....

The very first thing you have to learn is the difference between the concepts of need and want.  And all the recommendations I see to "get an app" make me laugh, especially where there is a statement saying it will save you x-amount and time too.

After that it is just a matter of reporting to some extent.

Utilities - don't pay a utility by using an account, use an item with qty and rate.  Then reporting, hell even charting, will show you why utility expense is going up.  If the rate is constant and elect is increasing - one of two things, something is wearing out and drawing more current, or there is mis-use somewhere.

Insurance, shop around every year - then call your present insurer and quote the lowest price for the same coverage, 99% of the time they will match it rather than increasing your premiem.  And if they won't, cancel and start new coverage with a new insurance company.

IMO you should do the most to insure that fixed costs remain as close to fixed as possible.

Established Member

Re: Three Tips from Two Accountants Who Know How to Manage Expenses

This is very interesting to know. Thank you for sharing with us.

Established Member

Re: Three Tips from Two Accountants Who Know How to Manage Expenses

Seriously thank you for this because is an area that confuses a lot of us. 

Established Community Backer *

Re: Three Tips from Two Accountants Who Know How to Manage Expenses

The simple answer is that it is a matter of how taxes are filed in relation to sole proprietorship, compared with LLC, S Corp and C Corp. I've seen them discussed as having value there, and explained below a high level/rough overview why it those difference exist. I have never seen someone quantify it though. But it is about taxes, and claiming of expenses vs itemized deductions. 

 

So, the article makes an assumption about prior knowledge for the different entity types. 

 

An S Corp is a C Corp that is taxed like an LLC, because the tax profit or loss flows directly from the entity to the ownership. Which is why they are called "Flow through entities." A C Corp doesn't have this functionality. It is a completely separate entity and company tax filings are not connected in any way with ownership.

 

The place where this would be of benefit, is if as an owner of a C Corp, a salary is collected, which is a deductible expense for the corporation, but that salary is income on the personal return of the owner/employee. Which is fine, an S Corp can utilize this functionality and is a very common arrangement. But in a "Flow through entity" if the entity makes a profit distribution. There is no tax extra taxation, as the tax profit or loss has already flown through to the owner, but with a C Corp, that distribution will have been exposed to taxes through the C Corp, and also as profit received by the owner, which is "Double taxation."

 

The reason filing an entity can save money, whether LLC, S Corp, or C Corp can save money is on taxable expenses. Certain expenses are easier to write off as expenses to the entity than they are to a sole proprietorship. Because buying a couch in an office is an easy expense to claim because it is furniture in an office, and is accounted for with the entity on  a separate tax schedule before flowing down to the owner. When it is a sole proprietorship, there isn't a separate area, it would need to be claimed as itemized deductions and go directly onto the owners personal tax return. And there are a lot of restrictions on itemized deductions for personal returns. 

Established Community Backer ***

Re: Three Tips from Two Accountants Who Know How to Manage Expenses

@Edie I'm wondering what other areas you feel are confusing regarding managing expenses, etc. Maybe we can answer some more of your questions here in the QB Community :-)

ProAdvisor

Re: Three Tips from Two Accountants Who Know How to Manage Expenses

Some states have a minimum tax for S-Corps & they do not for LLC. Also, in as S-Corp, you should be on salary & not just take a dividend at year end. In an LLC, you don't have to be on payroll & pay the state & federal unemployment tax. Some states will not allow the owner to collec unemployment. So why pay the tax.

 

read article below on being more than a 2% business owner in an S-Corp & how it affect your salary & health & accident insurance.

 

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

Experienced Member

Re: Three Tips from Two Accountants Who Know How to Manage Expenses

What if you repair machinery and you need a building added to your property to work on the equipment. Is the building, Tools, and power deductible?

or would it be better to rent a garage down the road?

Established Community Backer ***

Re: Three Tips from Two Accountants Who Know How to Manage Expenses


David_Murray wrote:

What if you repair machinery and you need a building added to your property to work on the equipment. Is the building, Tools, and power deductible?

or would it be better to rent a garage down the road?


Power is always an expense

 

If you buy a building or build one that is a fixed asset and not an expense

If you rent a building, that is rent expense

Tool puchase depends on the cost, high dollar long life tools are usually fixed assets and subject to depreciation.  In the US, currently a tool that costs over $2,500 must be a fixed asset. Less than that de minimus amount, it is an option.