2020 has been a year of many lessons. From social distancing to cutting our own hair, we have all had to learn to adapt in a pandemic-driven world. It has been a time of change, reflection and fear.
For many self-employed individuals, including RIAs, the Covid-19 pandemic has provided an additional lesson: education in the finances of having your own business, courtesy of the Paycheck Protection Program (PPP). Suddenly understanding the number on Line 31 of your Schedule C became essential. During the PPP process, many business owners were dismayed to discover that they did not have the type of record-keeping, process and structure necessary to participate in the PPP loan program.
“No one could have anticipated COVID-19 and the subsequent loan programs,” explains Eric Pierre, CPA and owner of Pierre Accounting in Southern California and Austin, Texas. “Being organized allows you to be proactive instead of reactive and in a position to take advantage of the opportunities that come in downturns like this.”
As Congress considers additional legislation for small businesses, this may be a good inflection point for the self-employed to take a look at their financials and make the necessary changes to maximize their businesses.
Getting Your Books in Order
One of the hardest aspects of being self-employed is that you are often wearing multiple hats, including that of CFO. While it is important to track all your income and expenses in order to maximize your income, sometimes it can be hard to find the time.
One of the most critical parts of a business, whether with thousands of employees or just yourself, is to have a bookkeeping system. Bookkeeping enables you to monitor your income and expenses and determine how the business is doing. This was a key focus of the PPP loan process, since the loan could be used for expenses such as rent and utilities, assuming you could provide documentation from the 2019 tax year.
Many self-employed individuals may feel that formal bookkeeping is an unnecessary step or not cost effective. Those who had access to this data during the Covid-19 crisis, however, found they had the flexibility to make decisions on what expenses were necessary for their business to survive.
The most logical step is to hire a bookkeeper. For a self-employed individual, the cost of a bookkeeper ranges from several hundred dollars a year to several thousand, depending upon the complexity of the business. While not insignificant, there is value in this expense.
“This allows the self-employed individual to stay focused on what they’re good at,” says Pierre. “By investing in a good bookkeeper, you will make more money in the long term by freeing up time to focus on growing your business instead of draining energy with something that can be overwhelming and cost more money to fix long term.”
For those who don't feel they have the ability to hire a bookkeeper, there are many user-friendly platforms to help create a profit and loss statement on a monthly basis.
Regardless of the approach you use, having monthly P&L statements can make many business issues clearer.
Having the Right Accounts
One of the biggest obstacles for a lot of self-employed individuals during the PPP process was that they did not have a bank account in the name of their business. Often, they use personal accounts or joint accounts with their spouses. As a result, a number of these individuals were unable to apply for PPP loans at a lot of the major banks because many banks required the applicant be a pre-existing business customer.
With the influx of fintech companies like Kabbage and Square participating in the space, many people were eventually able to find help getting a PPP loan, but the situation is a wakeup call for the self-employed to establish a proper banking relationship. Having a separate account for the business segregates business funds from personal funds, enabling you to seek help from your bank as well as become informed as to the types of small business services they offer.
Further, having a separate business account will facilitate and simplify the bookkeeping process, especially if you’re doing it on your own.
Seeking Professional Help
It can also be helpful to have a tax professional involved with your business planning. While Schedule C is often straightforward, a professional can help you maximize opportunities that you may not have considered.
“A tax professional can provide financial savings and opportunities that the self-employed individual wouldn’t be able to get on their own,” says Pierre.
These can include understanding what ordinary and necessary expenses can be run through the business, as well as the maximizing of your profit in your business with a SEP IRA.
Today is the Right Day to Start
With the experience learned from the first part of the PPP process, self-employed individuals should embrace this moment as a chance to organize their business and gain control. Pierre offers perhaps the best rationale for getting organized: “Because you’ll never know what is going to happen.”