Starting out a consulting business can be very lucrative. However, it can also result in a heavy tax bill you do not organize your income and expense properly. So, how do you organize your income and expenses?
You can start by opening a different bank account. Do not mix your business bank account with your personal bank account. All business-related income should come to this account and all expenses should be paid from this account. Your client will send you to form 1099-misc at the end of the year. IRS will also reactive a copy of this 1099. That being said your total business income should be greater or equal to the amount listed in 1099. You may get an automated customer-generated audit if you report a total income less than the amount listed on your 1099. Keeping a separate bank account will help in calculating total business income and you act as proof in case of an audit.
Now you need to deal with your business expenses. The easiest way to do this is to categories your business expenses. We recommend you use the same or similar categories listed on schedule C. This will help during tax time. Now, every time you pay a bill, you simply need to enter that transaction in the correct category. You can use a simple spreadsheet, financial software or you can use a shoe-box. Most CPA firms also provide bookkeeping services. For example, you can simply send us your bank statement at the end of the month and we can do the complete bookkeeping. We will assign each expense into appropriate categories based upon its tax implication.
What are some of the most popular business expense categories?
- Advertising – All expenses paid for online marketing or print marketing including business cards or flyers.
- Consultation Fees – Fee paid to professionals like attorney, CPA, or marketing professionals.
- Insurance Cost – Business Insurance Expenses including life, property & casualty, or business insurance
- Interest Cost – Interest cost of your business loans. You can include fees and other related cost.
- Office expense – Any supply or equipment you purchase for your business operation.
- Rent or lease other business property – Cost of operating your business office.
- Repairs and maintenance – Include all cost related to your business only.
- Travel – the cost of traveling to a business-related event like convention, meeting, or business trip
- Meals and entertainment – You can include meals and entertainment expenses related to your business.
- Utilities –electricity, gas, telephone, internet
- Other expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses.
Health Insurance expenses: Premiums paid for your health insurance are tax-deductible. You can deduct the full cost of health insurance premiums on form 1040 but you must have an Income from your business. You can deduct the health insurance cost event if you run into losses but it has to be reported differently. Consult with your CPA to ensure you are reporting the deduction properly.
Still have a question about your business expense? Leave us a comment or call our office at 510-825-7563