Many businesses use a petty-cash account for small, everyday, transactions. If your business is one of them, the following guidelines will help prevent pilferage and increase tax benefits.
First, designate a reasonable amount of capital to the fund. It should be large enough to not need constant replenishment, but small enough to discourage theft. This can vary depending on the size of your business, so it’s mostly a judgement call. You should also specify what can be purchased with the funds in the account and require employees to log their transactions. To get tax rebates, keep all receipts, making sure to record the date, location, store, and items purchased. Track the destination as well so you can claim transportation costs. Although it seems like a no-brainer, keep the petty cash in a secure location and restrict access to it. This will not only prevent theft, but it will also improve record keeping.
If you have children above the age of 14, hire them. Instead of giving those lazy supplicants a weekly allowance, teach them the value of hard work by granting them gainful employment. Not only can your kids receive a tax free, yearly salary of $6,100, but they can also put up to $5,500 a year into a Roth IRA retirement fund (tax free of course). Your business gets a tax write off and neither you nor your children get taxed on the wages – it’s a win-win.
If you are a newly established business, you may be getting taxed more than your neighbors. Ask around (or go to city hall and look it up) to see what the rates are for everyone else. Use this information to negotiate a better deal for your own business. If your firm is expanding, your negotiation position is particularly powerful. More often than not, community authorities will negotiate on taxes to keep you in town – saving local jobs while still benefiting from from your firm’s tax contributions.
Deductions for meals and entertainment should also be accounted for. Take your clients (or potential clients) out to discuss business. Just be sure you actually conduct a bit of business, lest your requests be rejected by the IRS. On a similar vein, the environment in which you are “entertaining” must be conducive to business. So if you want to deduct tickets for a loud baseball game, make sure you can show that you discussed business either before or after the game.
If you are planning to deduct a party, track your guest list. You can deduct 100% of the costs If the party is for the general public or employees and their families. If the party is for clients, potential clients, and/or independent contractors, you are only allowed to deduct 50% of the costs. Alternatively, a party with a mix of clients and employees can be deducted in proportion to the number of guests within each respective category.
Take pictures or videos of business being conducted during events as proof, just in case those IRS bastards show up at your door. Have guests RSVP or sign a guest log that clearly shows their relationship to the firm (customer, employee, supplier, etc.). Furthermore, it is wise to never get too extravagant. Although it is one of those subjective grey areas that can be argued with auditors, it’s hard to prove that you needed a five-star restaurant and a $1,000 bottle of wine to entertain a young, attractive, “potential customer”.
WORKING FROM HOME DEDUCTIONS
If you work from home or have a home office, you probably qualify for several deductions. You can claim $5 for every square foot of your home-office space up to 300 square feet. This area, though, must be used exclusively for business. So if your work desk doubles as your kitchen table, you won’t be able to deduct it. Utilities such as heating and electricity, broadband costs, and structural upgrades (i.e. painting, new carpet, remodeling, etc.) can also be deducted on a proportional basis. Pretty much anything you use for business, from paper to iPads, can be deducted. However, if you also use the same items for leisure purposes, you’re only allowed a partial deduction.
Businesses are also allowed to deduct yearly “shareholders meetings”. This is a great excuse for the self-employed business people to take a “working” vacation.
A business owner should also consider utilizing various health insurance schemes and business structures to save money. If your spouse or partner participates in an employer-subsidized insurance plan, then you are disqualified from deducting your insurance costs. Otherwise, you are likely eligible to deduct the insurance costs for both yourself and your family. For the sole proprietors out there, consider incorporating as an LLC S Corporation. Doing so has many benefits. Namely, after paying yourself a “reasonable” taxed salary, you can take money out as a profit distribution that isn’t subject to self-employment taxes.