The importance of keeping good financial records cannot be overstated, and good accounting habits now will pay off down the road for your fledgling business.
Accurate financial record-keeping is vital to your business's future. It's important:
- When it's time to prepare your taxes.
- When you need to apply for financing.
- To monitor your business's progress and financial health.
- If you ever want to sell your business.
If you intend to keep good financial records, the only way to do it is to develop good recordkeeping habits from the very beginning. In all likelihood, if you start off with bad habits, you'll never get back on track. There are numerous software packages designed specifically to maintain accounting records. If you use computers in your business, these packages should definitely be considered.
Even if your business has an accountant, you should know something about basic accounting principles. Setting up your books in an organized manner is one of the most important, and most ignored, first steps a new owner can take.
Your accountant should be able to advise you on the best way to set up your books. Before you talk to your accountant, however, you may want to learn as much as you can about how to manage your own business finances. A good place to start is with your basic bookkeeping.
Accounting for startup expenses
If you incur startup expenses, the IRS permits you to deduct a certain amount in the year you incurred them, but it requires you to amortize and deduct the expenses over a period of at least 180 months, provided that you subsequently enter the trade or business to which the expenses relate.
Expenses incurred after the business begins operation, however, are often deductible in the first year. It's often a good idea to postpone some expenses until after your first customer arrives.
Which expenses must be amortized? The amortization only applies to expenses incurred after you decide to establish a particular business and before the business actually begins operation. It applies to expenses such as advertising; salaries and wages paid to employees who are being trained; travel expenses incurred in lining up prospective distributors, suppliers, or customers; and salaries and fees paid or incurred for executives, consultants, or similar professional services.
It does not, however, apply to expenses that would not be deductible if incurred after you start the business. (In other words, the expense has to be the type that would qualify as a business expense, if you were already in business.) If you incurred expenses in connection with the sale of an interest in your partnership, you would not be able to amortize the expenses because they are not deductible after the start of a business. However, there is a companion provision that permits you to amortize many of these organizational expenses.
Don't forget that you must actually enter the trade or business in order to be eligible for the amortization. Thus, if you incur expenses in exploring a business opportunity and later decide not to pursue the opportunity, you cannot amortize those expenses.
You can find out more about this subject in our discussion of business startup expenditures.