Have you joined me for Q+A Wednesday? On the first Wednesday of each month, you’re invited to join the Catalyst community of women entrepreneurs and me for support and sharing. You can’t build that empire alone – get help with your most challenging business questions. This month, we talked about how business owners save money and retire. Our guest expert Linda Lingo is a Financial Coach and CPA, helps her clients dream about the future and coaches them to get out of debt, plan for retirement, and invest money wisely.

Money – the topic of financial literacy (or lack thereof) comes up with every one of my clients. The challenges and symptoms are unique to each client, but even my wealthiest clients have a lil something funky going on under the surface when it comes to cash. We all do – no one seems to have just the right amount. We’re impacted positively and negatively by either having too much or too little (or alternating between both).

But, mastering finances is especially essential for women entrepreneurs. Even some of my brightest and most motivated clients don’t understand money management or how to accumulate wealth, which hinders their growth. They’re tenacious and creative and get the business off the ground, but they don’t know how to manage their money to uplevel and wonder where the money has gone. If this sounds familiar, you are not alone. We live in a society that hasn’t always stressed STEM skills, especially for women and girls, and money is intimidating for some.

A critical component for how business owners save money and retire is mindset – starting to think of yourself as the kind of powerful person who has already grown a business. To get where you want to be, you must assume the role of a person already meeting your goals and having confidence in your ability to manage and grow your money. By looking ahead, finding the help you need, and putting systems in place, you’re paving the way to make (and keep) more money.

The Foundation: Separate Personal and Business Finances

I asked Linda about the importance of separating personal and business finances – solopreneurs, small business owners, and new business owners commonly co-mingle their funds instead of managing them separately. Some of my clients have had the attitude of “it’s all the same bucket, right? All of it is mine. What does it matter?” They’re still paying for personal purchases from a business account or depositing customer payments from their clients into their personal accounts. And I tell them that they have to keep those funds separate.

Linda shared that one of the primary reasons to separate your funds is that you’ll have more transparency into how profitable your business is. You can’t do that if you’re commingling your funds. She told us about a client she worked with who was very profitable but didn’t know it because she pocketed the cash she collected or used it for groceries. She didn’t keep her books up-to-date and didn’t have any clue as to where her business was financially. This makes it easy for money to slip through your fingers and more challenging to save. The starting point is to establish separate accounts for your business to better track your business expenses and draws or profit.

Next, Linda told us that if you haven’t established an EIN (Employer Identification Number), most businesses will need to get one by registering with the IRS – it’s like a social security number you set up for your business. You must then decide what kind of entity you’re setting up – that could be an LLC (limited liability corporation), an S Corp, or a C Corp (a CPA will help you decide which is best for you on several factors).

You will then set up a business checking account (and consider a business credit card to start building business credit). This makes tracking business income and expenses more manageable. Linda shared that she charges her recurring purchases, like Zoom and Constant Contact, to a business credit card. Visit sites like NerdWallet.com to determine which rewards card is best for you to use your purchases to accumulate travel or cashback benefits. For example, I’ve charged my high-dollar and recurring business purchases to a Citi Bank card for several years. It earns travel points with my favorite airline – first class, baby!

Keeping More of Your Money: Tracking Expenses and Write Offs

Separating your business finances also allows you to track all your business expenses efficiently. That, in turn, makes it easier to capture tax write-offs (business purchases are deducted from your income, lowering how much of your income is taxed – crucial for managing how much you’re paying in taxes).

Linda mentioned that tracking is one of the hardest things for her small business clients. They don’t always take the time to track those expenses, but you should check with your CPA on which expenses you can pass through your business to maximize this benefit. For example, if you’re going to lunch with a friend, and you’ll be talking about business, you can write that off as a business expense. If you have an office and buy coffee for employees, you can write that off as a business expense. The same goes for office supplies and other business-related expenses like your home office – you can write off a portion of your mortgage interest, insurance, utilities, repairs, and appreciation. The same goes with your cell phone (the IRS allows you to track what percentage of your phone calls you make for business, and write off that percentage of your expenses – talk to your tax professional for more details).

Some of Linda’s clients don’t keep receipts, which the IRS requires in an audit. Or they keep them in a shoebox, which makes it challenging to organize when tax season arrives. Be sure to keep your receipts with your tax returns for a minimum of seven years. If you’re meeting with a client over coffee or lunch, write who you met with on the receipt. If you prefer to go paperless, research apps like Expensify or Receipts by Wave to capture images of your receipts. Linda chooses to file her hard copies in folders by tax category (meals, auto, etc.) and keeps a running tally of the amount each time she files her receipts so that they’re already totaled when she does her taxes each year.

How Business Owners Save Money and Retire: Gaining Control

I shared with Linda that many clients struggle with understanding bookkeeping. I’m a firm believer that you should be delegating as many tasks as possible that aren’t the highest and best use of your time. But, if you’re going to manage your books yourself, you must use a bookkeeping program like Quickbooks or Freshbooks. Some of my clients try to manage expenses and income on paper or in an Excel spreadsheet, which is extremely ineffective. To grow your business and make more money, you must take control by putting the infrastructure in place to manage more money.

Bookkeeping software offers more transparency with reports like your Profit and Loss Statement showing where the money is coming from and where it’s going. It helps us identify trends, like if expenses are going up and where a business owner can save money. Most bookkeeping programs perform several roles, making it easy to generate invoices and integrate with your online banking to make the reconciliation of transactions much faster. In addition to Quickbooks and Freshbooks mentioned above, some other platforms to consider are:

One more note on the importance of bookkeeping – keeping your books up-to-date will make it easier for your tax professional to give you helpful advice. In Q4 each year, my CPA logs into my Quickbooks account to roughly estimate how much I will owe in taxes for the year so there aren’t any surprises (by the way, PLEASE KEEP UP WITH YOUR ESTIMATED TAXES, you do not want to piss off the IRS). She’ll also tell me if I should spend money on business expenses like replacing computers or pre-paying rent and if I should hold off on depositing incoming payments until the New Year to lower my taxes.

Looking Ahead: How Business Owners Save Money and Retire

To bring the conversation full circle, once each of these elements is in place, you’re ready to work with an advisor – this is how business owners save money and retire. I shared that working with an advisor has been essential to growing my wealth. But, when I got started in business during the Great Recession, I went into debt and had nothing to invest. Why would I work with an advisor when I have no money to save or invest? At the time, we paid a flat fee for our advisor to audit our finances, look at the mess we were in, and create a plan to get out of debt while creating a rainy-day fund. Now that we’re out of debt, we are saving money and investing every month, and we have a plan to fund our future goals.

Linda told us that an IRA (Individual Retirement Arrangements) is a great way to save for retirement, (as of this writing) up to $6,000 is the maximum you can save annually in this type of account plus an additional $1,000 “catch up” if you’re 50 years old or older. A Simple IRA is a product that Linda commonly recommends for entrepreneurs with 25 or fewer employees. In this type of retirement vehicle, the employer and the employee can contribute to the employee savings, and as the employer, you have two options. You can either set it up so that you’re matching up to 3% of the employee’s annual compensation or contributing a non-elective 2% of each employee’s salary. There is a $13,500 maximum contribution for this type of account this year (as of this writing), with $3,000 catch-up allowed for individuals 50 years and older.

Another type of retirement savings account is a SEP (Simplified Employee Pension), in which only the employer contributes. This is good for self-employed small business owners with fluctuating income, and you may include your spouse and employees. According to the IRS, “Contributions an employer can make to an employee’s SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation, or $57,000 for 2020 and $58,000 for 2021 ($56,000 for 2019).

Finally, Linda shared that the most robust type of retirement savings account for solopreneurs, in her opinion, is a solo 401k. The contribution limit is $19,500 in 2021 and is subject to cost-of-living adjustments. If you eventually hire someone, you can freeze your solo 401k because you cannot contribute to it unless you’re a solopreneur. This is why it’s vital to know your business model and how many employees you think you’ll have. But, again, if your situation changes, you can freeze your contributions to this type of account or roll it over to another retirement account.

Linda reminded us that even if you aren’t able to max out your contribution (like that $57,000 401k contribution limit!), it’s essential to put away anything you can. Even one or two thousand dollars for the year helps. Once we started saving even small amounts, I shared that it became addictive watching that number increase, and we began finding ways to save more over time.

Q+A

Q: Are my business taxes part of my personal taxes? What if I also still have a job?

A: Talk to your tax professional – some businesses are structured so that they have their own, and some are rolled up into your personal returns. There may also be times you’ll want to change the structure of your business (say from LLC to S Corp) based on your growing income, which will save you money.

If you still have a full-time job, this gets a little more complicated, especially if you’re saving for retirement and you’re contributing to a 401k. This is why working with a qualified tax professional is very important.

Q: I want to know how you can write off a home office for business purposes. For example, my computer room is also for personal use. I use it for business, and I heard that you’re supposed to only use it for business to write it off. Is that true?

A: Yes, you can write off expenses related to a home office, but the IRS says that “If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.”

Q: Is there a certain amount of time you’re supposed to keep receipts? Sometimes I’ll keep a receipt if it’s important, like for a larger purchase. But how long am I supposed to keep them?

A: For seven years. The receipts just need to be stored someplace accessible in case you are audited. So you don’t have to keep paper copies, but you should scan and save them. In any case, you should keep all of your tax returns and related documentation for a minimum of seven years – that’s how far back the IRS can go for audit purposes. In a typical audit, Linda also shared that the IRS is very targeted, zeroing in on a particular expense or category of expenses. Online expenses will be scrutinized more in the coming year. Be ready to justify costs as business-related.

Q: You have mentioned tax preparers, financial planners, and CPAs. Would you recommend that we have all three of those as business owners?

A: The lines get blurred. Each of these professionals may have some overlap in the services they provide, which can be a good thing for providing checks and balances and different options and perspectives. You may have a CPA who offers bookkeeping and tax preparation services (or you may have a separate bookkeeper managing your books, which costs less, and your CPA who checks the books for accuracy and prepares your taxes). Some CPAs are now offering financial planning advice, but generally, the CPA (or Certified Public Accountant) specializes in tax preparation.

Linda suggested working with a professional who specialized in financial planning advice, though. For example, as a money coach, Linda’s specialty is helping her clients dream about retirement, figure out their retirement goals, and how much they need to save. She would then refer them to a financial advisor (an expert in investment products like stocks, bonds, and mutual funds) to handle the investments that they need to meet those goals.

Another professional we haven’t talked about is an estate planning attorney. This is the next layer in financial planning – you need to make sure you’ve got a will and a trust to outline how you want your assets to be distributed.

This team should work together and will occasionally connect by phone or email as different scenarios, challenges, or opportunities arise since they all will impact one another. Linda shared that it isn’t uncommon for her to participate in Zoom calls with an estate planning attorney and a CPA, as well as a financial advisor at times.

Ready to learn more? Don’t go it alone – join Jennifer at Q+A Wednesday on the first Wednesday of each month, or sign up to get the playback. If you’re ready to create your financial plan, contact Linda Lingo today.

This article is for informational purposes only. You should not construe this information or any other content as investment, financial, tax or legal advice. Please talk with your financial advisor or tax professional to customize a plan that’s right for you.