This is the time of year a lot of entrepreneurs talk about goals for the New Year. They make big plans for sales and revenue. However, these types of plans are fruitless unless you have completed your prior year’s accounting. It's difficult to know where you're going unless you know where you've been.
There are several businesses financial tasks that you need to finish on last year’s accounting before you make this year’s plans. Here are the things you don’t want to forget:
Last Year’s Revenue
Before you try to project what you will make this year, you should have a firm grasp on the amount of revenue you had last year. You want to make sure to account for income even if it was not reported to the IRS. Trying to ignore income you know you received, even if it was paid in cash or not reported, will come back to haunt you. If you are selected for a random tax audit, the IRS will scrutinize your return even closer if they think you are trying to hide money.
1099s
Look over the 1099s you have received from all the people that have contracted you to do work for them. Did everyone send you one? Match the 1099s to your bank deposits and make sure all of your deposits are accounted for. If you have deposits that weren’t counted as income, make sure you can explain these. If you are audited by the IRS, they will want to know where that money came from.
If you have 1099s that you feel are incorrect or don’t match the figures for which you have accounted, speak with the firm that paid you and see if you can get the mistake reconciled. If not, it is better to accept what the other company says they paid you, even if it means your income is slightly over reported.
Trying to fight this type of inconsistency, with the IRS in the middle, is not worth the hassle for less than a hundred dollars in extra taxes. But if you can, come to an agreement with the other company and have them issue a corrected 1099.
Companies are to issue 1099’s to their contractors by Jan. 31st, but they have until Feb. 28th to send them to the IRS. This time differential is specifically so corrections can be made after contractors see them and before they are sent to the IRS.
There may also be a difference in December payments with the different companies’ accounting systems. You may show that you received a payment in January, but the company that sent the check wrote it in December so they reported it this year, but you had it accounted for the coming year.
Mileage Deductions
A tax deduction that is often overlooked by small businesses is the mileage deduction. You can either take the standard mileage deduction or itemize your expenses for gas, repairs, parking, etc. as it relates to your business. However, you can’t take deductions for both mileage and expenses.
Home Office Deduction
Business owners that work from their homes often either neglect or are afraid to take the deduction for business use of their home. A decade ago, taking this deduction was scrutinized by the auditors. It was difficult to have this deduction approved unless you actually met with clients in your home. Business owners needed a “dedicated” space in which they conducted business.
Today, these parameters have been eased and it is expected that anyone who works from home will deduct a portion of those expenses as a business deduction. This is one of the most missed deductions for people who do their own taxes.
Anyone who runs an online business out of their home should be taking this deduction. It’s obvious that your home is where you conduct your business. If you work on your dining room table 80% of the time, under the old rules, you wouldn’t qualify for a home office deduction. Now, those rules no longer apply and you can take a percentage of that space and deduct the costs of maintaining it as a business expense.
An easy way to compute this is to take the area of your home and calculate what percentage of your total square footage is used as your office space. You can then deduct that percentage of your mortgage, property taxes, repairs, utilities, etc. (Don’t forget to deduct a portion of your internet service!) You can depreciate your home as you would any other asset and even deduct part of your Home Owner’s Association fee. You’re leaving a lot of money on the table if you miss this one!
The IRS has recently approved an alternative way of taking a home office deduction. You can now take a standard $5.00 deduction for every square foot of office space in your home. This, however, may not be as beneficial as taking a percentage of your expenses.
Health Insurance
As an entrepreneur, health insurance premiums are 100% deductible. This is not the case with your friends who work for someone else. It is a benefit for the self-employed. Be sure you don’t forget this one.
Retirement Plans
Finally, after you calculated your income from the previous year, don’t forget to make contributions to your retirement account.
The Bottom Line
I know, all the cool kids have their revenue projections for the coming year done by New Year’s Day. But, until your taxes from the previous year have been calculated, it’s useless to set revenue and profit goals for the coming year.
Don’t get ahead of yourself and project a ten percent increase in profits for the coming year until you are able to put a dollar figure on what that would be.
