Date: November 16, 2022
Basic Financial Terms You Need to Know as an Entrepreneur
Being a business owner means that you are busy juggling marketing, sales, operations, payroll and service delivery (to name just a few). With so much to balance, it’s easy to get overwhelmed especially when it comes to the financial side of your business. You may already know that it is a smart investment to hire an expert to do your accounting, as it saves you time and ensures accuracy. It’s also a good idea to familiarize yourself with some basic financial terms – not just so you can sound smart, but because they have real-life implications. Some of the basic terms you should know are:
1. Cost Basis – this is the original price of an asset. It is used to determine capital gains and losses (or profits or losses on investments). For instance, if you were to buy stock for $10 dollars and sell it for $15, the cost basis would be $10. Why is this important to know? It will help you later when your revenue increases, and especially during tax time. Being familiar with your cost basis can help ensure you are not one of many business owners that end up overpaying in taxes! It doesn’t just apply to stocks either, it applies to any asset you own (home, car, etc). Anytime you sell an asset for a gain, you can bet your bottom dollar that the IRS will want their cut. You can reduce that cut by making sure you keep really good track of how much money you’ve put into the asset over time, so when you do sell it – you only pay tax on the ACTUAL gain, not just the sales price minus the purchase price. It’s a way for you to reduce the tax you pay when you do realize a gain on a sale.
2. Co-mingling – refers to the mixing of your personal expenses with your business expenses. Not only will this open you up to a dreaded IRS Audit, but it will also make it difficult for your accountant to track business expenses and cash flow. The problem here is that you’ll never truly understand how your business is performing and you may make the wrong financial decisions based on skewed data. If you apply for lending, co-mingling may disqualify you for much needed funds since it isn’t clear what is personal versus business. Keep your business accounts for business only – any personal autopayments should be switched to your personal accounts. If you accidentally charge a business expense on a personal account, just let your accountant know and they will make sure it is recorded accurately. Co-mingling (while convenient) is extremely risky and should be avoided at all times.
3. Depreciation- defined as ‘the decrease in the value of assets and the method used to write off the cost of a tangible asset (such as equipment or a car) over its useful life span.’ This basically means that you can generally write off a fixed asset used for business purposes. There are several ways to calculate depreciation, so it’s a smart move to speak with a Tax Expert to gain more insight into the different ways, and so they can help you ensure it is done correctly. Depreciation is not an actual cash event, but you can get a tax deduction for the ‘decline in value’ over time. For example, when you buy a car worth 40k, the minute you drive it off the lot you can no longer sell it for 40k, the more miles you add the lower you can sell it for. Instead of writing off the full 40k when you purchase the vehicle, depreciation allows you to take a deduction EVERY YEAR while it is being ‘depreciated’ until the value of the asset has been fully recovered. With the 40k vehicle, if it was depreciated over 10 years that would be a $4,000 deduction every year.
We are passionate about helping small business owners take advantage of the tax savings provisions that exist. Having a Tax Expert on your side will ensure that you are not one of the estimated 93% of business owners that end up overpaying in taxes. The Tax Code is purposely confusing and difficult to navigate. Having expert guidance is key to the growth and success of your business and financial goals. If you think you are potentially overpaying or could benefit from a complimentary assessment of your business needs, contact us here to speak with one of our Tax Experts. Start saving!