Bookkeeping for Business Owners
First and foremost in keeping your company legitimate is to make sure that you keep your personal expenses separate from your business expenses. To keep and maintain a clear delineation of your company from your personal affairs you should only pay business expenses out of your business/corporate account. Accordingly you will want to ensure that you only issue monies for your personal affairs out of your business and not out of your corporate account/monies.
One of the first issues if a legal challenge is faced will be for the judicial authorities to determine if you have indeed acted and behaved as a corporation would and should under the auspices of federal and state law. Corporations and other legally recognized entities have many legal laws as well as formalized business practices that they should follow. Many times when a small business owner begins their own venture they tend to let the area between personal and business become unduly blurred when there is confusion between what is a personal item versus what is business. Tax law generally requires that valid business expenditures are those which are necessary for the valid business affairs of a business and for the furtherance of its survivability and profitability.
Often it is best to contemplate many of these questions in light of what you would do if you were employed by a Fortune 1000 company. If you were to ask yourself these questions in light of this environment then most of your decisions would gain clarity in this new found light. If in working for a major company you were asked the below questions what would be the anticipated/correct response:
- Would my corporation have an annual Board of Directors/Shareholders Meeting?
- If I was a corporate officer would I sign contracts in the corporate name while being sure to also list my title (i.e., President)?
- If I incurred business expenses, such as mileage, personally would I turn in an expense report to get reimbursed?
- Would I be expected to only pay valid business expenses out of the corporate account?
As you read through and evaluate these you can see that the answer to all of these particular questions is yes. As a benchmark to help keep you on track, please be sure to always ask yourself what would be the norm/expected if you were acting in a fiduciary relationship for another and what would be acceptable. In fact, though you may be the sole owner of your business you are indeed acting in a fiduciary capacity for your business as a corporation has most all of the same legal rights and responsibilities as an individual in protecting its rights and the full rights and abilities of ownership of all types of property both real estate as well as intellectual property. Given the ability to contract, a corporation may perform and expect others to fulfill their duties as detailed in a formal contract or everyday business practices.
Please be reminded that all business owners/entities are required to have a valid business license. Typically these are gained from the county in which you live, unless your office is within the city limits of a town/municipality. If so you will obtain your business license there. Also you will be expected to file annual tax returns, to pay a company's annual registration with the state, file and pay payroll as well as sales tax filings and reports, and property tax payments and reports for corporate real estate and fixed assets. Thus, the services of a good CPA will bode you well as you strive to overcome the complexity of the varying tax laws and rules from the varying governmental agencies.
Should Your Business Take a Home Office Deduction?
For business owners who might run their business out of their home, tax law allows for you to deduct the prorated business use portion of the home which is being used exclusively for business. Thus, your dining room where you entertain guests will not qualify unless of course you take the dining room table out and put your office in there, using it solely for that purpose.
However, due to tax law allowing only to deduct the building and not the land, the building being depreciated over an extended time period, and that you are only able to deduct the business portion of the home, I find it generally not advantageous to take the deduction. Given the limitation of the deduction that tax law requires, I have generally found that the burden of the record-keeping for both the client and myself to be unduly burdensome for the limited amount of tax savings afforded.
I advise my clients not to take a home office deduction. In evaluating all potential deductions I try to keep my client's pocketbook in mind as spending roughly the same amount in professional fees as the tax savings allowed seems not be a primary benefit of those I serve, the client.
When you are furnishing your office whether it be in space your business or yourself own (as long as the area is dedicated exclusively to your business) the expenditures are valid payments of the business. If you operate your business out of your home this will hold true as well, however you should be sure to only deduct the prorated business use portion of expenses such as utilities. I recommend that for these expenses the business owners pay the expenses personally and then turn in an expense report to obtain reimbursement for the business use portion.
Being an expert at running your business does not make you one at the responsibility of accounting for your business. By applying our decades of experience we are well suited to guide you to track the financial and operational affairs of your business.
