Tax and accounting tips from Jay Holmes, CPA
Earlier this month, we sat down with Jay Holmes, CPA and principle at Blueback Accounting, for an informal Q&A about how freelancers, small business owners, and other entrepreneurs can set themselves up for financial success in the 2019 tax season.
You can find the full video here; if you’d rather quickly read the highlights, you can find our questions and his answers below. They’ve been edited for brevity and clarity.
Question: Let’s talk a little about the foundational stuff. Let’s say I’m new to the space — I’m an emerging entrepreneur. I’m going to be setting up my business. What should I be keeping in mind?
Answer: The foundation of a business is paying and getting paid. That’s the basic foundation of any accounting system. You need a bank account, and then you need a way for money to get into your bank account, from your customers. And, of course, you need a way to pay people.
Once that’s really set up, the accounting system (which is really just the record keeping of all those transactions) comes next. You need to be organized, and you need a solid system. That system helps you frequently do things and stay on top of things.
I can’t emphasize enough the importance of consistency in your bookkeeping and accounting. Get it done on a monthly basis, or spend 20–30 minutes every week to pick away at it so it doesn’t stack up and become a real bear.
Question: Can you talk a bit about bookkeeping vs. accounting? What are the differences, and how do they interact?
Answer: I don’t look at it as one vs. the other; I think the bookkeeping is an integral part of the accounting system and the accounting system also includes bigger picture things: budgeting, diving into margins or strategy, and of course figuring out how taxes fit into everything.
At Blueback, we started out thinking that we’d be a tax and consulting shop, but we’ve evolved and bookkeeping is now the foundation of our business. It’s the foundation because it builds the relationship and it allows us to see what’s going on in the business. Taxes are more of a supplement to that because the reality is that we can help business owners more through bookkeeping, and looking at their business, and being more of a business strategist … rather than just offering them tax advice.
Question: If you’re a new entrepreneur, what should you expect to pay for bookkeeping services? Is this usually a monthly or annual fee, or just during tax season?
Answer: I think there’s certainly a range. It can range from $20 all the way up to $70 or $80 per hour. There are bookkeeping services that you can get for $20 an hour, but you certainly get what you pay for. At that level, you’re getting someone that can take your bank statement and put it into the accounting system — something more input driven than output.
The way we do it at Blueback is we come up with a base fee for all services, and then we go through a checklist of what we offer. We try to create a solid ecosystem where we can deliver a lot of value and the value is based on the relationship. We bundled up bookkeeping, tax prep, business strategy.
Ultimately, your bookkeeping costs will really depend on your small business, which will be completely different than someone else’s. It could be $150, it could be $400 or $500. It just really depends on what industry you’re in and how complicated your books are.
Question: Do you suggest that early on, entrepreneurs open a business bank account and make sure that business account allows you to have a downloadable spreadsheet of your expenses and income?
Answer: Absolutely. I think there’s a fine line between the freelancer, to the new business, to the mature business. The importance of having a business bank account is huge and there’s a couple of reasons. First, it enables you to separate your business and personal expenses. It streamlines everything and really reduces a lot of the back and forth.
Also, you know a lot of business owners start out as an LLC. That entity protects you from personal liability … but if you’re mixing things — if you have a personal bank account with business money coming in and out of it — the reality is you don’t have separation. The work to create that extra entity just kind of crumbles.
When you get that business bank account, you set everything apart and operate as if you were running an actual business. There’s a lot of people who think “Well, I can have this side job as a side job,” but they don’t realize that you should treat it as a real business and make decisions as if it were. And certainly you don’t have big corporations that are paying their mortgage out of the business checking account because that’s just not the correct way to do business.
Question: It seems like almost everyone has a side gig now. I’m sure you’re seeing more of that vs. the more traditional small business. What are some of the differences? What should you be thinking about if you’re a sole proprietor or a freelancer vs. a small business with a few employees?
Answer: I think (which is kind of contrary here) that the freelancer is actually a little more complex. There’s a little bit of money here, and a little bit there. They’re not running a business, they’re just doing side jobs and it’s really hard to accumulate all the information in a way that’s timely and efficient. If you’re working for Uber, and selling something on Etsy … you might have three or four different income streams.
It’s really hard to track, which is unfortunate because it seems to get easier as you scale. So if you’re a freelancer and you say “Wait a minute, I want to start a new business,” the accounting actually becomes easier as your business grows because your processes are all in place. We actually find that small businesses with two to three employees are great to work with because things are streamlined.
Question: I know there are some things small business often think about at the end of the year, as they’re preparing to close out their books and get ready for tax season. Could you talk a bit about year-end tax strategies? Should we be making large purchases before the end of the tax year?
Answer: Where we stand at Blueback — our thought process is that there’s really two avenues here. We can run your business so that you don’t pay much tax or we can run your business to build wealth. Those two paths are often very, very hard to do together because building wealth means more money in your own pocket, while lowering your taxes means that you’re spending more money and giving it to someone else, or you’re giving it to yourself via retirement accounts that you can’t touch for 23 years.
So, we take the path of building wealth. We’re going to try to minimize your tax, but at the end of the day we don’t recommend buying a new truck every year or two years because that’s giving the car company more money, not yourself. There’s no sense paying a dollar to save forty sense.
The end of the year is a great time to get your books cleaned up, do some budgeting, and plan for what’s next. I also think the end of the year is a great time to reach out to any customers that owe you money. Many folks are eager to pay bills at the end of the year because they want to reduce their taxable income.
Question: Let’s talk about deductions. So, let’s say I’m a graphic designer and I bought a computer to do my work, plus I got a membership for Adobe Creative Cloud. Can I deduct these expenses? Do you think people over-utilize or under-utilize deductions? What should we be looking out for as entrepreneurs?
Answer: That’s a great question. I often see two completely opposite scenarios on this: the business owner that’s afraid to deduct anything and then the business owner who says “I got into business so I could take advantage of everything.”
I think that anything that you need to spend in order to run your business is definitely deductible. There’s different layers, though; for many expenses, there’s a grey area or a personal component. If you go out by yourself and eat lunch at a restaurant while taking notes or doing work, that’s generally not considered a business expense. If you go out to lunch with a client or to close a deal, that’s absolutely a business expense.
The general rule is that you can deduct expenses that are ordinary and necessary in your industry and your business. I like to push a little further, asking “If you were employed, would your employer spend money on this?” If so, it’s likely a reasonable deduction.
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Remember, these are just the highlights of our conversation with Jay. If you’d like to hear more, check out the full recording for more tips and answers.
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