Question For The Small Business Owners
Business By cakecrumb Updated 25 Mar 2007 , 12:58am by tincanbaby
okay, i was talking to a friend of mine who has her own small business (not cake related). she was telling me that her accountant advises her to try to 'break even' by the end of the year so she will only have to pay minimal taxes, if any at all. to do this, she tries to write off whatever she can - business related of course.
i'm confused. how does one actually make money from a business without having to hand it all over to uncle sam? how do small businesses thrive?
am i missing something? 
first, you want to be careful..... if you show a loss too many years in a row, the IRS can classify you as a "hobby" and not a business.
Some of the deductions are designed to make you money. Non-cake related example is when I owned rental properties. I was permitted to deduct something like $2500 a year in depreciation "expense". This was not money out of my pocket, but a legit "expense" allowed by law, reducing my tax liability against the rental income.
Another example is mileage on your car. I live 75 miles from my hometown, so I do a few weddings and events there. That's 150 round trip miles. Now depending on the cost of gas, I can get there and back for a tank of gas costing me $20-25. But at a mileage rate of $0.40/mile, Uncle Sam is going to pay me $60 for that trip. $25 out of pocket .... $60 "expense reimbursement".
Some things that you will be paying anyway are deductible, lowering your tax liability. You have to have insurance on your car and you would pay that whether you were in business or not, but as a business you deduct it. (Although the amount you pay on a COMMERCIAL auto policy is WAY more than a personal auto policy!). Most people have a cell phone anyway, but mine is a business phone .... deductible. Is your office in your home? If so, you can deduct a certain percentage of your household expenses (utilities, maintenance, insurance, landscaping, etc).
And of course the obligatory disclaimer: I am not a tax expert so be sure to check with your CPA on what is applicable in your situation!
P.S. I tend to look at my tax bill as a measurement of how successful I am. When I write a big sales tax check, it actually makes me feel great to know I had so many sales that it generated THAT much in sales tax!!
You don't have to pay income taxes on business expenses, including:
Payroll
Equipment
Supplies
If, over the year, your business generates $50,000 gross income and at the end of the year you have $0 left in your bank account because you've spent it all either on payroll, supplies, or you've reinvested it in the business, then you just "broke even". You can also claim depreciation of equipment as a loss.*
*I am not an accountant, I just play one on Cake Central. My mother in law is our business accountant, everything I know, I learned from her scolding me. 
how do small businesses thrive?
That's a loaded question!
There are many factors that make a business thrive/profitable/succeed.
1. Minimize expenses. Learn to cut out the extraneous things you're spending cash on each year. Do you need to buy a brand new mixer or can you get a good used one? Are you overspending on advertising that's not working? Can you buy your ingredients at better prices? Are you paying too much for office supplies? Take a good, critical look at your spending and see where you can cut back. Every single cent counts towards profitability.
2. Learn about your tax/deduction options. Hire a professional tax preparer/accountant to help you out. I did this for the first time this year and it's the best thing I've done for my business. Truly.
3. Make quality products. This is, by far, your best piece of advertisement. Clients LOVE to tell their friends about excellent food. Word-of-mouth goes a long way in our business. 90% of my business comes from word-of-mouth and I carry a full calendar during my work year. (Word-of-mouth saves me tons of money in advertising each year.)
4. Take business classes. Learn everything you can about running your business. There's more to being a cake designer than making cakes! There's no such thing as bad knowledge. Take classes at your community college, read biz books, attend seminars -- whatever you can afford and take time to participate in. (Remember: business courses are tax write offs.)
I hope that helps and I look forward to tips others might share.
aren't there "red flags" that the irs look at?....
if you get too "creative" with the right offs...and don't show a profit, after awhile,won't our dear uncle sam send someone out to audit you?
Here's a link of 8 things that generate a red flag. If you have a good CPA, he/she will be able to keep you on track, letting you have the deductions you deserve, staying away from the ones that are not applicable and good financial advice along the way!
http://www.askmen.com/money/investing_150/150_investing.html
thanx indydebi....
i'm slightly OCD....this outta help!
hmm..... good advice. I am alos just lost when it comes to this stuff. my brother is going to be a CPA but not for at least a few years!
Don't even attempt to have a small business unless one of two things:
1. You know enough business/tax accounting to prepare your own paperwork prep for your accountant. ( Cost difference between $250. yearly vs. $1500.00 yearly).
2. You allow in your costs to cover the expense your accountant will charge to not only oversee your taxes, but do the paperwork prep to do the taxes. (Cost can run $1500.00 and up depending on amount of paperwork).
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