Beware! The IRS is Watching

Attention all of you new entrepreneurs -- and there seems to be a lot of you out there due to the recession.

The IRS will be watching you.  Small business has been under the watchful eye of our tax collectors for the past several years.  You are much more likely to be audited than individual wage earners and big corporations.

Here are a few tips that I offer first time entrepreneurs on how to begin to manage your finances in a way that will help keep things in order:

1. Set up a separate checkbook and get a credit care that is just for your business.  Keeping good records on your business expenses is critical.  Having a clean set of records in a checking account just for your business and credit card records for business transactions is the first step.  Keep notes on what you spend to help jog your memory if you ever get questioned by the IRS -- you may need to justify it as a business expenses. These records will also make preparing your tax return easier.
2. Speaking of tax returns --  remember that there are now over 70,000 pages in the federal tax code.  This is a system created by accountants for accountants.  I recommend you hire a CPA who knows business taxes.  Even with a very small business things can get confusing in a hurry.  I would start out being very conservative on what you consider to be a business expense until you learn what is really allowable from your CPA.
   
3. Speaking of taxes -- set aside a savings account to put money away for your tax bill.  You will not have withholding anymore, so that means it is up to you to have the cash on hand when tax day arrives.  I would recommend setting aside at least 30% of your net cash flow (after expenses), and even a bit more if you live in a state that has its own income tax.
4. If you don't have a program like Quick Books, set up a simple Excel document to track your monthly income and expenses.

Ben Cunningham passed along an article from Time.com that has a few more thoughts on all of this.