Advice from professional bookkeepers to keep your peace of mind & your small business in the green
Don’t co-mingle:
Don’t co-mingle personal expenses within business accounts. Keep personal transactions out of your business bank and credit card accounts. Even as a sole proprietorship, it’s strongly recommended to have a separate bank account used for business income and expenses. This extends itself to Paypal and other third party payment platform accounts that have your personal name on them.
Since changes taking place in 2023, if you make more than $600 on Venmo or similar payment processing platforms, that are in your name, but represent your business activity, depending on how your business entity is set up, your tax preparer may have to do some fancy footwork to make adjustments for this on your business return as well as your personal return. They will likely charge you extra for this and then have a conversation with you about getting the name and tax identification number switched over to your business. So be sure any third party payment processing apps are in your business name and not your personal name.
Use petty cash correctly:
Use petty cash correctly. Don’t take out ATM withdrawals and say its all for supplies. Just like a bank will provide a statement of digital transactions, you as a business owner or the assigned petty cashier should be keeping written track of the amount spent, transaction date and what it was spent on. This tracking report should have a beginning date and balance as well as an ending date and balance. These transaction details need to be recorded on a document that you can provide to your bookkeeper so the bookkeeper can account for the different categories of expenses and tie out and reconcile the period ending balance of the petty cash fund to the financial reports.
Petty cash funds are meant for small expenses like office supplies, flowers, lunch for employees and reimbursing employee expenses. The fund is not generally meant for paying contractors regularly. A business would be wise to implement strict internal controls and policies around who is allowed to access the cash, who can approve necessary transactions and who needs to record the expenses.
Have an accountable plan in place:
Have an accountable plan in place for employee reimbursements. If you reimburse an employee and you do not have an accountable plan in place, those reimbursements to the employee will be treated as supplemental wages and subject to tax. It’s as simple as filing out something like this PDF accountable plan here that you can download and use for yourself. If you don’t have a sheet like this to give the IRS during an audit, you may be denied those legitimate business-related expenses and then be required to pay tax on the reimbursements as if they were income to you personally. This is significant for businesses with employees and particularly S-corps. Since those businesses taxed as S-corps require you, potentially the sole shareholder, to be an employee it’s important to have this on hand. Often sole shareholders will write off vehicle expenses or home office expenses that are not in the business name. Those are technically reimbursements to yourself, under the accountable plan, and allow the business to deduct those expenses.
Keep receipts:
Keep receipts whether it was paid from a bank, credit card or petty cash fund. QuickBooks Online has a feature where you can take a picture and email them to yourself to be saved with your expenses online. Same goes for larger purchases throughout the year that may be over $2,500 which your tax preparer may want to see. Any employee who spent their own personal funds to pay for business expenses will also need these to include receipts with their reimbursement sheet.
Save those receipts in case of an audit. Without them, all deductions may be denied leaving a large balance due to the IRS from unpaid tax on the higher income as well as late filing penalties and penalties for not paying that tax on time.
Don’t cheat:
It may be tempting to sneak in a few meals with your family onto your business card or have your business pay for your kid’s summer camp, but the amount you’re actually going to save in taxes owed is not going to be worth the vulnerability you’re setting your business up for and also the increased scrutiny of a potential auditor. Also, these behaviors get out of hand and then your spouse begins to think it’s okay to go shopping with the business card. We see this all the time. You are not hiding if you do this. Don’t try to cheat or pretend you didn’t realize that you just tried to write off your Corvette as a business expense. The IRS has some very intelligent ways that are not always obvious to business owners on how they can gauge whether something is within the realms of acceptability or not.
You know those numbers you use on your tax return to let the IRS know what type of business you operate? Those are called NAICS. It stands for North American Industry Classification System. This is not just to let the IRS know what type of business you are offering. The IRS has an intricate system of ordinary and necessary ranges of the common expenses and activities built up around each code so that an automated flag can be raised if you stray from the norms. So if you code yourself as a chiropractor and have a high amount of travel expenses that you’re claiming for your business, you may get a flag raised.
Hire a professional:
Don’t try to maintain your own books. I know, coming from a bookkeeping firm this may seem like a biased thing to advise. However, at the same time, this is coming from a bookkeeping firm that sees a lot of books, many of which business owners have previously tried to maintain themselves. Unless you have a solid grasp on financial accounting, it’s better for you, your business and your peace of mind to let a professional deal with your books. If you bring a messy set of books to your tax preparer, they’ll end up charging you more to get them sorted out enough to use to prepare the taxes.
Not all tax preparers are bookkeepers. Conversely, not all bookkeepers are tax preparers. If you pay someone to prepare your taxes and not clean up your books, without knowing it, they may make adjustments to your books that can lock up certain historical features of bookkeeping software and make it useless unless it’s all undone and all redone again.
For example, accounts receivable usually have customer names associated with each transaction. If your accounts receivable needs an adjustment to prepare your taxes, don’t expect the tax preparer to have your books’ best interest in mind. They may make a global adjustment to a default or dummy customer. Unless you go back and adjust that, your customers’ accounts and balances attached to the outstanding transactions that were just swept under the rug, can never be rectified unless you go back and take some dedicated time to make changes. A task which you probably don’t know how to do if they were wrong to start with. A bookkeeper is going to charge you more to go back and clean up.
Bottom line is, hire a bookkeeper to maintain your books on a regular basis. Then hire a tax professional to prepare your taxes. These may be performed by the same person, but these are different tasks, and both essential.
The professional bookkeepers at Accounting Freedom have you and your books’ best interest in mind. If you can’t reliably trust your financial reports, it’s time for a clean up. We can get you back on track and keep your financial information sorted so you can run your business and make confident and informed decisions about your business.