Are you struggling to organize your income and expenses? Is the tracking of these items overwhelming for you as an entrepreneur or small business owner? Keeping great records is an important part of doing business. The truth is you do not want to be caught off guard during an IRS tax audit, so you need to have things in order.
This means you should safeguard the proof you need to validate the income and expenses you report to the IRS on your taxes. How can you best keep this information safe, though?
Keeping track of all of this information can take work, something most business owners would rather not do. After all, you usually can’t make money by working on your books. Instead, you make money by selling goods and services.
That doesn’t make it any less important, though. As a tax professional at Borshoff Consulting, we love helping business owners keep track of their income and expenses; it’s just one of the areas we specialize in. We feel duty-bound to help small business owners look at their bookkeeping, payroll, and tax planning expenses from a perspective that helps them stay confident, knowing they won’t have IRS problems.
They know this because we have helped them put together a plan that keeps all of their data regarding their transactions safe and accessible in a way that will appease the IRS or state agency should they come knocking on the door for that information. Being prepared is a crucial part of running your own business, so make sure you have a plan in place before an IRS audit begins.
Separate Personal and Business Items
It’s important that you not only organize your information for the government, should they need it, but also for you. What makes the most sense to you as a business, and what can you keep up with going forward? Take these things into consideration when you decide on a program to use for your accounting and tracking purposes.
Regardless of how you have your business organized, it’s recommended that you have a separate bank account and credit card for your business. Keep personal expenditures separate from your business expenses. You will be glad you did when you need to know and calculate business versus personal income and expenses.
This may mean you have to determine what personal income you need to move weekly, monthly, or yearly, but keep specified records for easy bookkeeping. Just make sure you keep everything separate because it will make things easier for both accounting and tax purposes.
Find the Right Tracking Method for Your Business
So, how can you best track your business’s income and expenses for tax purposes? As you probably know, having receipts, invoices, and credit card transactions related to business can make recordkeeping complicated. What is the best way to keep track of all this? It really depends on your business.
Factors you may want to consider when deciding the best method of tracking include:
- Your comfort level with technology
- Your level of desire to go paperless
- The amount of tracking you need taken care of
One recommendation is using Quickbooks. This will keep everything together, making sure nothing goes missing. You could also just use a simple Microsoft Excel spreadsheet if you have fewer transactions to track.
Whatever tracking method you choose, make sure you are consistent. However you decide to organize things, just do it the same way each time. This way, it will be easier to find something if you need it. Even though many of these options have easy to use features, you still may want to take the time to double-check everything.
For example, Quickbooks Online has an application that allows you to take photos of your receipts and invoices you receive. It then matches the receipts and invoices to the transaction records from your bank account or credit card statement. However, it only looks at the amount, so you must check to make sure it’s matching things up correctly.
Most businesses receive income from a number of sources. You may receive a check written to you, or maybe you accept credit card payments. If you receive income from PayPal, that is another source of income that you will need to keep track of. If you have an online store, running an eCommerce business, or something similar, that is another source of income.
Often, eCommerce businesses tie payments to a particular credit card merchant company. If your income runs through a checking account, your bank account typically logs your transactions but may not record who made the payment to you. If that is the case, you’ll need to make sure your credit card transaction company, your merchant company, has those reporting features.
You would want to have this information available to you for tax purposes – for the IRS and your state tax agency if sales tax was collected on those transactions. Furthermore, if you have multiple locations or manage multiple properties, you’ll want some sort of classification method in place that not only categorizes income but also divides expenses by different classifications.
One of the reasons that having the right classifications is important is due to tax preparation needs. When your tax preparer works on your annual taxes, he or she is typically going to ask for information about where your income came from and what category or classification it (the money coming in and/or going out) belongs to. If that information is already defined, it is less time consuming and simpler for all parties involved.
Classifying Income the Right Way
Make sure that you are accounting for certain income items separately from items that may look as if they were income items when really they are not income. For example, if you receive a business loan to purchase equipment and supplies, you will not want to record this as income to you on your books.
A loan is actually a balance sheet item that may come into your business but is not considered to be business income or business expenses, except for the interest you paid on the loan, which is the expendable part of the loan.
Classifying Expenses the Right Way
Similar to a business loan, some equipment purchases may or may not be expendable all at once. Depending on the cost of the equipment, the expense may need to be taken as depreciation on your books over several years, depending on the viable life expectancy of the equipment or property, if that is the case.
Another situation you may find yourself in with a business has expenses that are not dollar for dollar expenses from a tax standpoint. The most common example of this is meals. To include a meal as a deduction from income, it must have a constructive business purpose. For example, you have to be sharing a meal with a client, prospective client, or another individual you are doing business with.
Another common business expense that is not a dollar for dollar expense is health insurance for you and your family. There is a small business owner health insurance credit, but typically the health insurance cost of the company’s owner and his or her immediate family is not allowable as an income-reducing expense.
Moving Money from Business to Personal Accounts
There are a couple of ways to move money from your business accounts to your personal ones. The most common way to do this is through profit distributions, which you are allowed to take as long as you have the equity basis (profit) available to do so. You may decide to pull profit out of your business throughout the year or at year-end.
While this may seem like and look like an expense, the IRS calls this profit distribution, which may be subject to income tax on your tax return.
Another way to pay yourself business income is to put yourself on the business payroll. How you do this will depend on how you want or need to move money into your personal bank account.
You should now have a better idea of some different ways to keep track of your small business income and expenses. When working with a qualified tax consultant, he or she is probably going to expect you to have your information organized in some manner. Quickbooks Online is the most popular software as it has the best collaborative features and tools.
Setting up good administrative bookkeeping practices will pay off, especially as you grow. You may want to look at some mainstream tools for your business unless you use proprietary accounting software for your industry or one that ties to your other operational software.
If you have further questions about the best way to track income and expenses, please contact our office or check out our blog for more valuable tax advice. We offer tax resolution services, business consulting services, and many other services. Contact us today for a free tax consultation. You can trust Indiana’s tax expert!