Maintain Separate Checking Accounts
Start with your bank. Open a business checking account.
“If there’s ever a question as to whether it’s a hobby or a business, the IRS looks to see if you have a separate checking account,” says Richard Salmen, a certified financial planner with GEOTRUST Financial Partners in Overland Park, Kan.
- If you use Quicken, QuickBooks or Microsoft Money, Salmen advises making sure you have two separate systems: one for personal and one for business.
- Not only is having two accounts tax-smart, it will also improve your organization.
- At the end of the year, all your income and expenses will be in one place, making record keeping and tax filing easier. If you try to separate all your records in March or April, you won’t be able to accurately remember all the money moves from the prior tax year. Keeping good records year-long will give you proof of your business expenses if you do get audited.
Use A Business Credit Card
Lending requirements are quite strict for small businesses. Still, try to get a business credit card. Like a separate checking account, a credit card will help your record keeping and give you something to show the IRS if you’re audited.
The business credit card could give you an extra tax deduction too.
“If you need to carry a balance on a business credit card, that’s the only credit card interest that’s deductible as a business expense,” Salmen says.
Make it official
- Consider establishing a limited liability company (LLC) or an S Corp for your business.
- Sit down with your team of advisors–attorneys, CPAs, financial planners, and insurance agents–and determine what entity makes the most sense, how this business will impact your taxes and financial plan and what insurance coverage you should consider, Heil says.
- These business entities will also give your personal finances a new level of liability protection, which could come in very handy of your business is ever sued.
When It’s Time To File
Having a checking account, credit card, and record-keeping software earmarked exclusively for business use will give you most of what you need to file your taxes and to prove to the IRS that your business really is a business.