Shellie M. Bowman, EA, CRPC, MSM
So, you’ve started a business, made some money, now you must answer some tax and financial questions. Suddenly you realize you haven’t done any bookkeeping. But, you saved your business bank statements and receipts. Now you have some serious catching up to do. What do you do?
Fortunately, we’ve put together a ten-step list to get your business financially on point.
- Bank Statements. Begin by downloading or gathering all bank statement(s) for the respective period. If you are playing catch up for one month or three years, you will need all the company’s bank statements to begin comparing them to your business purchase receipts. This will help identify errors, differences, possible tax deductions, and mistakes in your bank records. Your bank account’s end balance for any period should match the balance in your bookkeeping records. This will help you in the long run. Besides your accountant will appreciate reconciled financial records.
- Gather your receipts. As mentioned in step 1, you will need your receipts. As a small business owner, you probably have receipts everywhere knowing you needed to save them. But the unanswered question is “what to do with them?”. So, you stash them in a file, shoe box, envelope, or something. Here is your answer, you need them to document and support business expenses, so pull them out. In this instance, the more you have, the better off you may be. So, gather everything from paid to unpaid invoices, business expenses you put on a credit card, cash paid business expenses, automobile expenses, vendor accounts, rent, monthly payments, and so on.
- Clearly separate business from personal expenses. I am going to assume you have already done this by establishing and using a dedicated business bank account and credit card(s). If not, things could turn messy, quickly. Examine every bank and or credit card transaction(s) and determine if the expense(s) was/were personal or business.
- Identify personal property used as business property. Vehicles, home offices, land, in some instances utilities, and so on. Be sure to consult with your qualified Tax Professional about the deductibility of said items. Many require special calculations to determine a business to personal use ratio.
- Develop a record keeping system. Bowman Tax & Financial published a records retention guide to provide guidance on keeping tax and financial records according to the Internal Revenue Service. Because of cloud based storage platforms and the ability to use leverage digital records, record keeping is less challenging than trying to preserve paper documents like days before.
- Collect and send information returns. During the year, if your company paid contractor(s), or any form of non-employee help, then it needs to issue the appropriate information returns. Information returns are forms such as form W-9, various 1099s, and others. A form W-9 requests a tax payer’s information and is best issued at the start of any relationship which requires payment from a business. While a form 1099 is used to report how much a business paid to its contractors during the year. Company employees must be issued form W-2 which provides the amount each employee earned and was withheld during the year.
- Determine annual net income. Total income minus expenses (business purchases, payroll, business space rental, etc.) equals net income (taxable). For an expense to be considered a business expense, the expense must be ordinary and necessary.
- Hire a Tax & Financial Professional. If you do not have time or the skill set to maintain good books and records for your business, hire in a professional. In my professional experience, most small business finds themselves in IRS or state tax authority trouble because of poor books and records which could mean financial ruin.
- Tax compliance needs to stay top of mind. As a small business owner, tax compliance is maintained because of good books and records. Not only will you maintain state and federal tax compliance, you will be able to consistently make better decisions to increase your company’s profitability.
- Finally, don’t let it happen again! To err is human. Everyone makes mistakes and that is ok. But, when you know better, you do better. By creating an organized system for keeping your business’ books and records, you will avoid mistakes requiring costly penalties and business reputation damage. Whether you hire a bookkeeper, use one of many cloud base platforms, or your own spreadsheet, set aside time each day to take care of your financial business. Staying on top of bookkeeping now is the best way to save yourself from a life of stress and financial ruin if the IRS or state were to ever come knocking.
For more information regarding this matter and other tax and financial matters, feel free to contact me at the following information below.
Bowman Tax & Financial
Keeping you on point