Bookkeeping for Business Tax Savings and Safety
Every small business owner handles or supervises hundreds or more transactions every month. From buying office supplies or inventory to invoicing customers, cash, checks, or credit/debit cards are all involved on a daily basis. The complexity of keeping up with all of this and having accurate records that could be required by the IRS can be a huge hassle. Setting up detailed proper procedures to account for and report these transactions can save you a major hassle later if the IRS comes knocking.
There are some excellent reasons to maintain separate and detailed checkbook and purchase records by business and to document them properly:
- Reduce Taxes – accurate and complete records, including checkbooks and card statements help you to pull together expenses that offset income and cut your tax bill.
- Audit Response – keeping all personal and business expenses separated, never commingled, is the first rule for audit safety. Keeping expenses, checkbook, and card statements separated by business and properly categorized will help you to get through an audit without losing your shirt.
- Corporation Protection – the corporate veil is easily pierced if you do not diligently separate expense payments. Keeping separate checkbooks and card statements help you to preserve the corporate veil and protect your assets.
- Better Planning and Decisions – Detailed records with segregated statements and checkbooks gives you reporting capabilities that are invaluable in analyzing where your money is going out, making purchase decisions, and future planning.
Those are the major reasons for better bookkeeping procedures, and the best practices for getting the job done follow.
- Do not use cash – Unless it just cannot be avoided, do not use cash. If you are travelling or for some other reason you need to use cash for business purposes, document it well and make notes on the receipts and ATM tickets.
- A receipt is only half the job – Some receipts itemize the items purchased, while many do not. Also, even if an item is there, it often is a stock number or incomplete description that will make it difficult to know what and why it was purchased. Make a note on receipts as to the business reason for the purchase and what was purchased. Also, record it in a ledger, checkbook, or software, as a box full of receipts makes an audit process a whole lot more painful. Even better, scan or photo it into a bookkeeping system with notes.
- Checkbook(s) – The most important rule is to maintain separate checkbooks, not only to keep personal expenses away from the business, but also to keep different businesses’ expenses separate.
- Credit/Debit cards – As with checkbooks, keep these separate for different businesses. Even if you are using a card that is not in the name of the business, keep cards separated for different businesses, never commingling purchases.
- Use technology – These days there are bookkeeping programs and apps that allow you to quickly record transactions in the appropriate accounting box by company and category. Some allow you to forward email receipts into the accounting, as well as take a photo of receipts that goes into the bookkeeping system automatically.
Putting together processes that allow you to easily and quickly get your purchases properly documented and into the system will ultimately save you more than just money. You will have less stress and hassle at tax time too.
General research and experience and https://www.irs.gov/pub/irs-pdf/p583.pdf