Category Archives: Accounting

Tracking Business Expenses in Direct Sales

Not many people enjoy having to do the books. But, if set up properly, and with the right knowledge, they are not as cumbersome.

Expenses

Expenses in Direct Sales (Photo credit: Phillie Casablanca)

For anyone who runs a business, they know that one of the tasks that must be accomplished is the accounting. For some, this is a job which they hate as much as toilet cleaning, but it is one that has to be done. Even if you use an accountant do to the final year end papers, if you do a good job with the day to day books, their job will be easier. Here are some ideas to help with tracking the expenses so that it will not be as much of a hassle.

Tips

  • Have a separate bank account for your business expenses
  • Put as many of your expenses on credit cards as possible
  • Create a place where you put all your receipts for when you sit down to do the books
  • Depending on how much paper you have, put everything for each month in one envelope
  • Have a filing cabinet so that if you have a lot of paper you can organize things in categories

Know Your Expenses

If you categorize your expenses correctly, it will end up helping you in the long run when it comes to tax time. This list assumes that you are running a business outside of your home, as there are other deductions that you are entitled to with a home based business.

  • Advertising – business cards, web site marketing
  • Insurance – Business insurance – does not include health insurance premiums
  • Interest – Any interest you pay on accounts such as credit cards or loans
  • Legal and/or professional services – Accountant or lawyer fees that you pay
  • Office Expenses – Anything beyond supplies for your office
  • Rent or lease – Premises or equipment
  • Supplies – Paper, toner, notepads or anything else routine
  • Travel – Cost of travelling to conventions or meetings
  • Meals/Entertainment – Amount paid for meals or entertaining clients. This has a special tax ramification which is why it should be separate
  • Utilities – Gas, electricity, telephone, Internet
  • Dues – Subscriptions to magazines or trade groups your business is a member of
  • Other – Any items that you are not sure where they belong can be put here

Make sure you keep the receipts that go with all of these expenses, as you will need them to show your accountant and possibly the IRS. But if you can get your expenses itemized through the year, it will make it easier for your accountant and you will spend less money.

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How to Handle your Business Expenses

Accounting and paperwork are scary to a lot of business owners, but it is a part of life. By setting up a system, you will make your life a lot easier.

Receipt Please

Receipt Please (Photo credit: Peter π)

For most people, accounting is not a priority in their business, but when month end or tax time comes, they are scrambling to find all their documents and prepare things. But if you take a bit of time each week or month to track your expenses, you will be ahead of the game and you will not have to look all over the place to find your paperwork.

One Location – First things first, put all your receipts in one location. This way, even if you do not have time to deal with it right now, you will know where to find it.

Make Notes – Mark your receipt with any relevant notes such as you were mailing a parcel to Jane or you took Joan out for coffee to discuss why your business would be a great fit with hers. These receipts are easy to forget their purpose.

Legibility – Make sure that the receipt is legible. If it is not, you can ask the location to write you a written receipt. If it is on the glossy till paper, you may want to photocopy or scan it, as those tend to fade over time.

Keep Current – Try to work on your books every week or at a minimum, once a month if you do not have a lot of transactions. This will save you a lot of time and headaches down the road.

Filing – Have a filing system that makes sense and you can keep up with. Challenge yourself to see how fast you can find something; if you have to go through multiple folders then it is not the right system for you.

Credit Cards – A great way to keep track of your spending is to put everything onto a credit card or debit card where you get a statement listing the expense. You won’t forget about it this way. Do not use the same card for your business as you do for your personal spending, as this can be very confusing and cause issues at tax time, especially if you are audited.

Envelopes/Folders – Envelopes and folders are a great way to organize your paperwork. Put unrecorded receipts in one until you record it, and then move to the appropriate folder once it’s recorded. You may choose to organize these by month or by type of expense; whichever works better for you and makes more sense.

One of the best reasons for keeping your expenses current and tracked is that you can see at a glance how well your business is doing and where you may be spending too much money. This is very important for a small business owner.

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You mentioned tracking mileage, why would I do this? And what should I do for this?

Great question!

The reason you track mileage is because you are likely running your business as a sole proprietorship, and therefore, you qualify for a lot of tax deductions.  One of them is a deduction for how much you use your car for your business.  If you do not keep track of how much you use your vehicle, you cannot reasonably deduct the use on your business.

This is what I recommend you do:

Purchase a notebook and get a pencil (helpful in cold climates)

On the first page, put your mileage the day you start your business, or the first of the year.  Record the mileage on the last day of the year as well.

Going forward record the following on each line:

Date       Starting Mileage   Ending Mileage   Destination

Jan 5       100,235                    100,263              Jane’s Party

I do not worry about calculating how much distance I went, as I enter this information into Excel at the end of the year and it takes care of the math for me.

When it comes to tax time, you take your ending mileage less your starting mileage, and you know how much driving you did for the year.  You can then take how much you drove for business (say 750) out of how much mileage you put on your car total (say 2000) and you will find 38% of the miles on your car were for business.

As a result, you can then use 38% of your vehicle expenses on your taxes.   You may be able to claim a flat fee instead for the miles you drove, which may be more beneficial.  You will want to discuss this with your tax person.

What do I need for tax time?

Hopefully you have been keeping track of all your bills for the year, and that will make your task easier.  Gather up everything that you have and take it with you to whoever does your taxes, or if you do your own, it will help as well.

Organize your paperwork by type – expenses together, sales together, etc – and add each one up.  You may also have categories such as advertising, supplies, giveaways and others.

Mileage – Figure out how many miles you drove, and what how many are business and how many are personal

Household Bills – If you can use any of your household bills, take these as well

House Costs – Depending on where you live, you may be able to deduct a portion of your house.  If so, you need to figure out what portion of your home is used for business.

Remember, January 1 is a new year, so you need to start a new box of paperwork.

  • Note:  I am not a tax accountant, so make sure to talk to your tax preparer for advice.

Tax Write-offs – Miscellaneous

Not only can we write off advertising and our vehicle in direct sales, there are a multitude of other items that can be written off.  Of course, the rules vary by where you live and the local rules, so make sure you are checking the relevant websites or your tax accountant to find out what you can write off.

Supplies – Chances are you already know that you can write off any supplies you purchase for your business.  This means catalogues, order forms and even product that you purchase for demonstration purposes.  If you do end up selling the demo products though, you have to report this as revenue.

Meals – If you meet a potential recruit for coffee or a meal, you can write this off.  Make sure you get a receipt and mark on it what the occasion was so you do not forget later.  In Canada, you cannot write off 100% of this expense, but every little bit helps.  If you are at a vendor event and purchase a meal, you may not be able to write this off, but again, it is best to ask.  Typically you can only write off a meal if you are away from your home area for a certain amount of time.

Samples – If you have purchased samples that you give away to customers, these are a write off.  These are items that you can typically only purchase through a supply order and that you cannot sell for cash.  You may put them in customer bags, give them away as prizes at events, or hand them out at trade shows.

Home Expenses – This is a category that can be complicated and difficult to determine if it is a valid expense and write off.  Typically, to get to write off a portion of your home, it has to be allocated specially to business use only.  For many people, this can be difficult as they do not have a lot of room that is not already in use somehow.  Your bills, such as your phone and Internet, are also tricky as you have to be able to prove what portion is used for your business.  For instance, you would need to prove that you use your Internet 25% of the time for business.  If you have a dedicated phone line, that is easy to prove, but it may be difficult to write off your regular home phone line.

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Tips on Home Based Business Deductions

You have embarked on the journey of self employment. The time flew by. You meant to keep track of all your income and deductions but you just did not know where to start. Now, it’s tax time and you are worried about the 1099’s that are starting to appear in your mailbox.

Stop worrying. It is not as hard as it looks.

With your Federal Income Tax Form 1040 you are going to need to file a Schedule C – Profit and Loss from a Business.

First, you will want to gather your bank statement, credit card statements and cash receipts that are related to the business. Using excel you can make lists of each of the categories I am about to discuss here. These totals will be places on the various sections on the tax form.

Next, gather all your 1099s and statement of accounts from clients/companies you received money from but did not receive a 1099 from. All income has to be reported.

The actual instructions on how to enter a 1099 will vary according to what tax program you are using. There will be a section, usually “Income” where you enter W-2’s. A 1099 will work in the same manner. The tax program should have a special section to enter the 1099. You will fill in all the information.

It will then take you to the Schedule C and it will go line by line. You will fill in these blanks from the totals you calculated on your excel sheet.

So what exactly can you deduct?

  • Advertising expense, including business cards
  • Auto expense if you use your car for your business
  • Commissions and fees you pay to others for work
  • Depreciation of office equipment
  • Self employment medical insurance coverage
  • Business insurance such as fire, theft, flood or other casualty.
  • Legal and professional fees
  • Office expense
  • Rent or lease of office space
  • Supplies
  • Business related meals, entertainment and travel

Keeping good records will help you keep track of these deductible expenses. Making tax time much less stressful and who doesn’t like that idea?

Chrystal Mahan –  Selfemployedwriter.com      thetaxqueen.com

How to Prevent Audits at Tax Time

Filing your federal tax return is probably either your favorite time of year or a tedious task that depletes your savings account. If you’re self-employed, you may have already figured out that you can deduct all sorts of things when April rolls around. Independent contractors who work in direct sales enjoy many different benefits at tax time, including deductions for business-related expenses and the ability to write off debts from self-employment. Make sure that you only deduct applicable expenses if you don’t want to find your tax return on the local auditor’s desk.

Don’t Get Greedy

Make sure you’re only claiming real deductions as you fill out your federal return. It’s okay to claim meal expenses and mileage for some professions, but review current IRS rules first. Auditors are said to have a strong interest in returns filled with deductions, so keep that in mind before you take off a few bucks for that lunch at Applebee’s.

Don’t Tell Them More Than They Need to Know

When you file a federal return, there’s no reason to mail in receipts or a copy of your self-employment earnings.  If the IRS wants this info, they’ll ask for it.  Don’t trigger an audit by offering extra documents or information.

Don’t File Too Early or Too Late

Self-employed folks should avoid filing on the first day of tax season or preparing a return long after April 15th has passed. Play it safe and file in February or March with the majority of the other taxpayers.  Avoid doing anything to call attention to your return, like requesting extension after extension or amending it at the last possible minute.

Final Thoughts

Tax time is never fun, but it’s even more stressful if your expenses are audited.  Play by the rules and keep an eye on your deductions to avoid receiving an unexpected letter from the IRS months after submitting your return.

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Tax Review for Direct Sellers

It’s the New Year!  While I know you are busy working on getting sales going again and keeping those resolutions, one thing that you should be thinking about is getting your taxes ready.  I know some people like to file as soon as they possibly can in February so here is some past articles about taxes to help you either finish off your 2012 year or to get 2013 started on the right foot.   Tax

These articles cover all sorts of topics from what you can and cannot use as a business write off, how to keep track of everything through the year so you are not as overwhelmed and how to get the most bang for your buck.  Of course, please remember that I am not a tax accountant and that you are best to talk to your personal accountant to know what will work best for you and your situation.

A Quick Tax Overview – Direct Sales
Keeping Track of Papers for Tax Time
Tax Information – Advertising Write Offs
Tax Information – Vehicle Write offs
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