If you’re a sole proprietor or a small business owner without a dedicated accountant or finance staff, chances are you’re not doing the basics.

But it’s still the beginning of the year. There’s still time to put in place best practices for record keeping and retirement planning.

Here’s the wrong way to go: let the receipts pile up. Manage your business finances based on the money in the bank. If your checking account has money, spend it. If your checking account doesn’t have a lot of money, save it. At the end of the year, turn in your receipts and accounting software to a tax preparer and wash your hands of the process. Rinse, repeat.

Unfortunately, this is the default mode for many small businesses, according to Cindy Montoya, owner of KAC Consulting in San Antonio. Eight years ago, she left her CPA practice to start her own firm targeting the types of small businesses typically overlooked by larger corporations.

Restaurants, she found, notoriously neglect their financial accounting. Service providers in the trades – electricians, plumbers, landscapers, building contractors – are also untrained and largely ignored by the accounting and tax preparation industry. These service providers are often self-employed or work as independent contractors for large construction companies.

Montoya says she got into serving this clientele because of her own family. Montoya had grown up keeping the books for his father, starting at age 12 when he ran a small business in Houston. Later in life, Montoya’s husband was typical of his clients.

Income tax forms. (Dreamtime/TNS)

Dream time, HO

“He was a general contractor. You put the finances in front of him and forget about it, it’s not going to happen,” she said.

Now describing her typical small business client, she said, “They need a lot of help with how to run their business, how to plan their taxes, and how not to drive your business looking in the rear view mirror.”

The “rearview mirror” is Montoya’s analogy for doing things the wrong way, much like I described above.

If she could give small business owners one New Year’s resolution to make, it would be to set up an accounting plan every month.

From a small business finance perspective, every day is a good day to start keeping your books right. But if you haven’t done it right, this month – now – is the time to start.

Bank reconciliation must take place monthly. Reviewing key performance indicators (called KPIs by the cool kids) is only possible if you keep good financial records. Good records mean knowing your up-to-date numbers for revenues, costs and profits.

For Montoya, the ability to speak with his clients on a regular basis — using updated metrics this month — is the difference between forward-looking tax planning and driving in the rearview mirror.

One of the biggest small business myths, Montoya says, is that the goal is to pay no taxes.

“So many small business owners want to buy, buy, buy with the idea that they’re cutting taxes by increasing deductions,” she said. “But it’s like using a 20% off coupon for something you don’t need. You are always spending money, usually on things that are losing value.

A better goal is to make and keep as much money as possible, which means not letting the tail of tax minimization wag the business dog.

I would add to Montoya’s important point about not optimizing your decisions for the smallest tax bill. Banks and investors really, really want to see annual profits in order to get involved in your business. If your small business is ever looking for outside money, you’ll usually need to have profits in the past, which means you’ll usually have had to pay significant taxes in the past. Paying taxes as a small business owner doesn’t mean you’ve failed. It means you are successful.

“Here’s the deal,” Montoya said. “If you don’t pay taxes, you haven’t earned any money! Our goal is for you to keep as much money as possible in your pocket.

When it comes to taxation as a small business owner, it’s worth pointing out a little-understood and quite important way to lower your tax bill through retirement savings. Regular salaried employees in 2022 can contribute up to $20,500 to their 401(k) or 403(b) retirement account. This number may increase somewhat if your employer matches some of your contributions. This is generally well understood. These limits increase a little in most years.

Independent business owners, however, can access a much bigger and better deal. What follows is less well understood by the types of companies Montoya works with.

In an independent business 401(k), business owners can contribute up to $61,000 per year, beginning in 2022, to their retirement plans. Contributions of up to $61,000 are made up of a three-part combination of pre-tax salary, pre-tax employer match, and pre-tax profit sharing, all of which are controllable by a business owner. If you are a small business owner and have enough income in a year to use this type of tax-efficient vehicle, you are going to need to contact a specialist to set this up. For example, January is not too early to start.

The contribution ceiling figures I quoted are for people under 50. If you are over 50, the relevant figures for individuals and the self-employed in 2022 are $27,000 and $67,500, respectively.

Michael Taylor is a columnist for the San Antonio Express-News, author of “The Financial Rules for New College Graduates” and host of the “No Hill For A Climber” podcast.

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