Chapter 4: Keeping the Books
We mentioned in the last chapter that getting your finances organized is a key way to avoid tax-season disasters. In this chapter, we'll look at three things you can do (and five classic mistakes to avoid) to achieve financial organization, even if you're not the naturally organized type.
5 Small-Business Bookkeeping Mistakes to Avoid
Let's start with what not to do. Andrew G. Poulos , an enrolled agent and principal of Poulos Account & Consulting, Inc. , has been in the business for 20 years. He helps small businesses and individuals with bookkeeping and tax matters and has seen his share of disastrous tax filings. When we spoke to him, he highlighted for us five common mistakes that are the most harmful to small-business owners' finances. Here they are:
- Counting loans as deposits. Whether you borrow money from a bank, a family member, or your own savings account, it should never be considered a deposit. Why? Because, explains Poulos, anything counted on the revenue side of the ledger is taxable. Loans don't come from a client and you have to pay them back, so you shouldn't have to pay taxes on them. If you took out loans, be sure to let your accountant know so they can adjust your taxes accordingly.
- Waiting until the last minute to work with an accountant. For personal taxes, you can get away with putting off filing your taxes. There is a whole industry built around this phenomenon. But as a business owner (and remember, you're considered a business owner even if you're just freelancing or doing a couple of contract projects), your taxes are a lot more complex. In fact, Poulos notes, even if you're the only person in your business, its taxes will function more like those of a major corporation than those of an individual. That's because businesses have to deal with…
- Deductions: Not everything you buy for your business is deductible. Some expenses are 100 percent deductible, some are partly deductible, and some are just plain not deductible. While it's smart to take all the deductions you're entitled to, it's risky to deduct carelessly. Expenses that don't seem related to your business are one of the top things that trigger IRS audits.
- Legal structure: We mentioned in Chapter 2 that the legal structure you choose will have tax implications. Here's where those implications come into play.
- Paying workers: You may not have employees, but if you contract any work (including bookkeeping, billing, or individual projects), it's important to classify workers properly. If you don't, you could face penalties at tax time.
- Not keeping good records. If your business is in full swing and you don't yet have a system for tracking income and expenses, catching up will require some work. In fact, Poulos estimates that getting caught up when you're behind is the hardest bookkeeping task for small-business owners. Like Zier, he recommends making time for recordkeeping no less often than weekly. He also notes that there are lots of apps and online software systems available to help IT professionals keep track of money. See the Resources section for some of his recommendations.
- Deducting everything. We've said it before and we'll say it again: not all business expenses are deductible. To minimize the likelihood of being audited by the IRS, let your accountant handle deductions. If you don't have enough revenue to justify working with an accountant, visit the IRS's guide to deducting business expenses . Some highlights: you can get deductions for a home office, business insurance, and Internet bills. You can get partial deductions for some client entertainment costs.
- Doing it all yourself. If small-business owners understood the tax code as well as tax professionals, claims Poulos, they would set up an appointment with an accountant the day they decided to strike out on their own. Of course, this rarely happens. Many business owners don't meet with a CPA until they've had a disastrous filing year. Take our advice on this one: call an accountant now.
Helpful Recordkeeping Software for Small IT Businesses:
What to Do Today to Get Organized
Let's imagine your finances are in a precarious state of disorganization and you have only ever spoken to an accountant by accident. Here's what you can do today to get your business finances shipshape ASAP:
- Ask family members, colleagues, and friends for recommendations of an accountant you could work with. As important as it is to collaborate with an accountant for your business, you shouldn't rush into choosing one. After all, this person will be responsible for handling sensitive information and helping you make important business choices based on that information. Your accountant should be someone you trust, and personal recommendations are a great place to start.
- Visit a site like Thumbtack.com for further recommendations (or if your immediate network doesn't have any). On sites like this, you can see ratings and comments from others who have used a CPA's services.
- Set calendar reminders to check in regularly with the professional you choose. Ask your tax professional how often you should meet, and then schedule those meetings immediately. Trust us: you will definitely forget about this otherwise and you'll be back in the same boat as if you never got your finances in order in the first place.
If you take away one thing from this chapter, it should be this: according to Poulos, it's never too early to implement a bookkeeping strategy. So get started. Start recording expenses and income. Worry about catching up later. Just start. Today.
Next: Chapter 5: Setting Prices