Buy or lease? It’s a decision many small businesses face. Owning real estate certainly can have advantages, including the opportunity to build equity. But many small businesses in need of space choose the rental route instead.

Cash Flow Considerations

By leasing, a company can avoid taking on debt to acquire a property. Less debt on the balance sheet may allow the company to finance other things, such as receivables or inventory and equipment purchases. And the upfront cash commitment needed to enter a lease agreement may be much lower than the down payment required for a property purchase.

Shopping Tips

If your business is looking around for the right rental location, here are a few suggestions to keep in mind. Not all of these tips are appropriate for all businesses, but some may help you get a lead on a good spot — and a good deal.

• Find an eager landlord. Rental spots that have been on the market for a while could have some negative features, but they may be worth a look. If you find a location that suits you, you might also find a landlord who is anxious to negotiate.

• Think about the term. A long­term lease locks in your rental rate — and that can be an advantage if you expect the market to trend upward. But leasing for short periods is often less expensive than leasing for longer periods. If your business is in its formative years, significant changes may lie ahead, so a short-­term arrangement could be more practical, too. Adding an “option to renew” clause can help keep your costs down and your options open.

• Divide and conquer. Could you make do with two smaller spaces instead of one large space? The more flexible you can be, the better your chances of finding a good deal.

• Check rental comps. Commercial property markets can be very localized. Rents may vary considerably between one locality and another just a few miles away. Unless you’re limited to a specific location, compare rates in several areas.

Owners of closely held C corporations are often interested in withdrawing profits from their companies in ways that minimize taxes. What are the options?

Pay Salary/Bonus.
If the owner is a company employee, taking more salary or a year­end bonus is an option, as long as the total amount of compensation the owner receives is reasonable. The company deducts the payments as a business expense; the owner is taxed on the money. The “cost” of this option depends on the corporation’s and the owner’s tax rates. Payroll taxes are an added expense.

Pay Family Members.
Reasonable amounts paid to an owner’s family members for services actually rendered to the company are deductible by the corporation and are taxable at the family members’ own tax rates. Often, these rates are much lower than theowner’s. Pay a Dividend. Dividends the company pays out will, in effect, be taxed twice — once at the corporate level (dividends are nondeductible) and once to the owner personally. No payroll taxes will be due. With the individual tax rate on qualifying dividends currently capped at 20% for taxpayers in the 39.6% regular bracket (and 15% for most other taxpayers), this option may have more appeal.

Utilize Fringe Benefits.
Certain fringe benefits are deductible by the corporation but not includible in the owner’s gross income. Examples include qualifying group life insurance, health care benefits, and disability insurance. (Most fringes must be provided on a nondiscriminatory basis to other company employees.) To the extent an owner is paying for these items individually, having the company pay for them increases the cash available to the owner.

Take a Loan.
If an owner borrows money from the corporation, the owner is not taxed on the loan amount. The loan must be a legitimate debt, with proper documentation and timely interest and principal payments.

Lease Assets to the Company.
An owner might consider leasing property to the corporation. The company deducts the lease payments; the owner includes the amounts received in income and deducts expenses associated with the rental activity.

If you run a small business, you already have a full plate. The last thing you need is for the IRS to question any of your business expense deductions. But it could happen. And that’s why having records that prove your expenses is so important. Even deductions for routine business expenses could be disallowed if you don’t have appropriate records.

What Records Are Required?

Except in a few instances, the tax law does not require any special kind of records. You’re free to have a recordkeeping system that is suited to your business, as long as it clearly shows your expenses. In addition to books that allow you to track and summarize your business transactions, you should keep supporting documents, such as:

• Canceled checks
• Cash register receipts
• Credit card sales slips
• Invoices
• Account statements

The rules are stricter for travel, entertainment, and transportation expenses. You should retain hotel bills or other documentary evidence (e.g., receipts, canceled checks) for each lodging expense and for any other expense of $75 or more. In addition, you should maintain a diary, log, or account book with the information described below.

Travel. Your records should show the cost of each separate expense for travel, lodging, and meals. For each trip, record your destination, the dates you left and returned, and the number of days spent on business. Also record the business purpose for the expense or the business benefit you gained or expected to gain. Incidental expenses, such as taxi fares, may be totaled in reasonable categories.

Entertainment. Record the date the entertainment took place and the amount of each separate expense, along with the name and address or location of the place of entertainment. Note the business purpose for the expense or the business benefit you gained or expected to gain and the nature of any business discussion or activity that took place. Also list the identities and occupations of the individuals you were entertaining or other information that indicates their business relationship to you.

If the entertainment was directly before or after a business discussion, be sure to indicate the date, place, nature, and duration of the discussion and the individuals who took part in both the discussion and the entertainment activity. For a business meal, you must prove that either you or your employee was present.

Transportation. As with travel and entertainment, you should record the amount and date of each separate expense. Note your business destination and the business purpose for the expense. If you are deducting actual car expenses, you’ll need to record the cost of the car and the date you started using it for business (for depreciation purposes). If you drive the car for both business and personal purposes or claim the standard mileage rate, keep records of the mileage for each business use and the total miles driven during the year.

Don’t Mix Business and Personal Expenses
Things can get tangled if you intermingle business and personal expenses. You can avoid headaches by having a separate business bank account and credit card.