If I had a penny for every time a small business client asked me one of the questions below, I might not be a CPA anymore. Whether they run a taco stand in downtown Denver or an oil and gas business in Durango doesn’t matter—many owners wonder the same things.
But consider a few things first.
I’ve had clients use their company credit cards to cover personal expenses such as vape pens, day spas and massages. Sure, you can technically do that, however, there is a catch. From a tax perspective, they aren’t qualified business expenses so you can’t write them all off.
Qualified business expenses are anything necessary and normal for running your small business, such as a phone or laptop. If your expense is common, you are safe to proceed. Out of the ordinary, and it’s not a good idea. Not to mention, the optics are bad. Imagine explaining to an investor why you are using company money to fun your spa day.
Things change for sole proprietors. Partners may not judge your spending habits, but business and personal finances get quickly muddied when clear definitions aren’t managed.
So sure, you can deduct personal expenses, but I advise keeping business and personal expenses separate.
“Why doesn’t my bank account balance match my income statement?”
People get confused when their income statement doesn’t match their balance sheet. Your net income is a statement of activity, not a statement of position. Let me explain:
- Income statement: A spending activity summary over a specific time frame. On this sheet, you’ll see how much revenue you made or if expenses climbed from hiring more employees.
- Balance sheet: Conversely, a balance sheet covers your current position. It reflects a snapshot of where your business is at a certain time. In other words, if you had to sell your business today, your business sheet would show what is left in cash.
“Do I need to keep every single business receipt?”
That crumpled-up pile of receipts you have stashed in a drawer is not helpful. Often, a bank or credit card statement is all you need to share with your accountant.
But, accurate recordkeeping is backs up the entries and can protect you in the case of an audit. You may have supporting documents such as sales slips, invoices, canceled checks, or an employee expense policy that tells people they need to keep receipts to validate their expenses.
If keeping up with paper receipts sounds as awful as it is, consider using a service like Expensify or Receipt Bank. These offer quick and easy ways to record your receipts and keep them digitally stored for when you need them.
“Should I buy something just to get a tax deduction?”
If you don’t need it, don’t spend it. Ultimately, you are taking cash from your business. If it is an expense you need to make for the sake of your company, do it. But just spending money to save money is counterintuitive.
You see, credits and deductions aren’t the same. Tax credits lower your taxes, while deductions just lower your taxable income.
- Deductions: If you’re in the 24-percent tax bracket, a $100 deduction would save you $24 on taxes.
- Tax credits: A $100 tax credit would mean you simply spend $100 less on your taxes.
If you have questions about taxes and financial best practices for your small business, give us a call. We are always happy to help!