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News, information, and opinions about:

  • Federal, State, and Virginia Beach Taxes
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If you have a question or comment, please drop me a line. Paul @ PIM Tax.

02 January 2017

accounting headachesI am not an accountant, but I will tell you without hesitation that accounting is important. If you are self-employed or starting a small business it is more than important – it is essential. You might get away with having your personal financial records in disarray, but if you are self-employed or starting a small business and you aren’t keeping your books properly you are begging for trouble.

Accounting is the language of business. It allows anyone to look at your books and understand where your business stands financially. Who might want to do this?

  • The bank if you need a loan.

  • The tax man (federal or state)

  • Someone thinking about buying (or buying into) your business

  • Anyone – like you – who is making decisions for the business

Roughly 40% of small business owners say that accounting is the worst part about running a business. You can put me in that category. I just wanted to help people with their taxes and financial planning. Keeping track of receipts for office supplies and internet service wasn’t supposed to be so darn time consuming! But I do it because it is important for PIM to succeed. More than half of small business startups in the United States fail. How many wouldn’t have if they had kept better track of their accounting?

Now that I have stressed the importance of accounting, let me take a step back and suggest something my accountant friends might find radical. (Possibly even alarming.)

Not everyone needs full strength accounting.

If you’re just starting up and/or self-employed you might not be considering a bank loan for your business. You might not be thinking about selling your business or bringing in a partner. You might just be doing your thing on the side and enjoying the extra cash flow when it happens. If this is the case, you might not need monthly/quarterly cash flow and income statements. You might not need to be able to produce a balance sheet on short notice. You might not need full strength accounting.

But you do need some accounting. You can’t escape the tax man. He will have his due. However, you may be able to satisfy him with some simple tax basis record keeping – and keep the tax man (and your tax preparer) satisfied when it is time to file (and pay) your taxes.

Tax basis record keeping is performed with the end result in mind. The end result is your tax return.  You must have sufficient records to file a correct tax return. So, what does the tax man want to know?

The tax man wants to know how much you made, because that’s what you pay taxes on. Therefore, you have to have some records showing how much money you earned – how much revenue you generated. You need to keep track of the cash that is coming into your business.

Does the tax man also want to know your business expenses? Not really. Your business expenses are deducted from your revenue, and that reduces the amount the tax man can tax. The tax man is perfectly content for you to pay taxes on all of your revenue. He doesn’t care whether you have any business expenses or not – but YOU do. You need those business expenses to reduce the amount of taxes you pay.

What the tax man cares about is whether or not you can properly document your business expenses. You are allowed to take the legitimate business expenses that you can prove. Therefore, proper record keeping of expenses is in your best interests.

For many self-employed people or small startup businesses, tracking your income and expenses is all the accounting you need. You can get a fancy program or hire an accountant for that, but I’m not sure why you would. A simple spreadsheet will do, and you can get simple spreadsheets for free with a Gmail account. (Google Sheets)

It will be helpful if you group your expenses in roughly the same manner the IRS does on schedule C (lines 8-27). You’ll be glad you did when it comes time file your tax return. Don’t lose a lot of sleep trying to figure out the difference between “supplies” (line 22) and “office expenses” (line 18) (or any of the several other poorly-defined categories on schedule C). Just pick one and do your best to be consistent. You’re not going to lose an audit for calling a commission (line 10) a professional service (line 17). They all get totaled on line 28, so no matter which category you chose it’s going to end up on line 28 sooner or later. Do your best and if you have questions, call me.

Slimmed down tax basis accounting can be a time (and money) saver if you don’t need full strength accounting. Just make sure you don’t need full strength accounting before you decide to cut some corners you actually shouldn’t be cutting. If you have a capital intensive business, need to borrow to expand, have employees and payroll, or thinking about selling your business one day you are going to need a balance sheet and cash flow statements. You will need full strength accounting.

But...if you’re driving for Uber, being a weekend photographer, walking dogs in the afternoon, or baking cupcakes in your home – you can probably just use a spreadsheet to keep track of your income and business expenses with a little tax basis accounting and be fine.

 

 

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, and the National Association of Personal Financial Advisors. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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