Some people who go into business for themselves do everything right from the start.  They learn what the area in which they live requires, get a business license, and go from there. But there are others who when they start out to have a business of their own, probably aren't thinking too much about the legal or tax side of things.  They're making their widgets or providing their service and as money starts rolling in they realize this is going somewhere and begin to look at the bigger picture.  I've known people who don't realize if you're making money on the side, you are supposed to report that income.  And yes, even if it's under $600.

When I was in my early 20s, I was an Avon lady.  Yep, I sure was.  I was so successful in my first campaign I was given a second neighborhood.  I did well in both neighborhoods – for a couple of months.  But then my sales plummeted.  I was doing the same thing I'd always done.  Every day after I got home from work I'd get on my bike and ride from door to door knocking on doors and leaving books.  Finally one of my good customers let me in on her perception of what was happening.  For one thing, the neighborhoods were low income, so it wasn't really practical to buy Avon every single campaign. And it was typical for these two neighborhoods to have an Avon lady come through once a year or so and then quit.  So over the years they had become accustomed to buying what they wanted in the first couple of months and then they were set for quite a while.  I finally quit because there seemed little point continuing.

The reason I mention my short lived success as an Avon lady is because I was introduced early on to the concept that if you earned income on the side, you were obligated to report it.   In my Avon starting packet I received a tax guide that explained everything, including down to portioning off a section of your home to work with your orders, and keep your inventory – your “home office” as it were.

But I digress.  Eventually the new entrepreneur learns about business expenses.  A mistake he or she may fall into thinking is, “This is a business expense, it's going to reduce the money I owe in taxes, so I may as well buy whatever I want!”

Maybe they even go so far as to use a business line of credit to splurge, buying a brand new desk when their old one, or a used one from Goodwill would have worked perfectly fine.  Or maybe they buy the fastest computer they can get their hands on, when it's not necessary.

While you want to take every legal business expense to reduce your tax liability, you also want to have some money to show a profit.  That's the reason for having a business, to earn extra money so that you can do whatever you want or need to do.  If you are throwing every single dollar you earn back into the business, what's the fun in that?

Another suggestion is to practice frugality in your business.  Now I'm saying to do this within reason.  Don't pinch pennies so tight that you're wasting your time or anyone else's time for that matter. Shop around and buy what you need on sale, but don't spend too much time bargain shopping.  There's a happy medium to strike and it's up to you to find it.

One of my favorite authors on taxes for the self-employed is June Walker. Her website is very helpful and I have found her book The Confident Indie: A Simple Guide to Deductions, Income and Taxes for The Creatively Self-employed to be extremely helpful in knowing what can or cannot be claimed as a business expense.

Do you have a business?  Did you ever make the mistake of spending too much money just to build up your business expenses?

This post was included at:

Carnival of Financial Camaraderie at Messy Money
Financial Carnival for Young Adults at Save and Conquer
Carnival of MoneyPros at Money Pros
Aspiring Blogger Financial Carnival at Aspiring Blogger