Small Business Accounting: Tips, Tricks and Advice from TaxMama

  on January 31 2012 10:15 AM
The National Debt Clock hangs on a wall next to an office for the Internal Revenue Service near Times Square in New York
The National Debt Clock hangs on a wall next to an office for the Internal Revenue Service near Times Square in New York Reuters

From day one, small businesses should get their accounting act together and apply crucial tips and tricks, said tax expert Eva Rosenberg, owner of TaxMama and author of “Small Business Taxes Made Easy.”

Beginning Basics

From day one, Rosenberg recommended going through some sort of beginner’s checklist, such as the one listed in her book.

One basic step many small businesses skip is state and city government licensing and registration, which later gets them in trouble.

Rosenberg also recommended hiring an Enrolled Agent or CPA for consulting and planning purposes at the beginning of small business ventures, which often saves time and trouble later on.

Depending on the region and the nature of the small business, accounting consulting costs can run from $100 to $350 per hour, said Rosenberg.

Another early decision fraught with tax implications is the small businesses’ form (e.g. sole proprietorships, partnerships, corporations, etc). If no decision is made, the form defaults to a sole proprietorship.

Bookkeeping

Also from day one, small businesses need to record the financial transactions.

Dome offers paper accounting books to do so, QuickBooks is a popular software solution and Outright.com is a popular online solution, said Rosenberg.

Opening a separate bank account for small businesses often makes bookkeeping easier, said Rosenberg.

One surprising but serious misconception small business owners have is that the 1099 forms they receive from customers constitutes recording keeping.

The 1099 form functions as a “tattletale to the IRS;” they are not substitutes for doing one’s own bookkeeping, said Rosenberg.

Common Pitfalls

Small businesses often do not deduct all the expenses and claim all the tax credits they could when it comes to driving, health care, home office and even child care.

These tax considerations are handled best when they are set up and planned from day one, said Rosenberg.

Contrastingly, many business owners are often too aggressive with deducting entertainment and dining expenses; doing so draws the suspicious of the IRS and may invite an audit.

Generally speaking, if small business owners’ profits do not make sense in the context of their personal expenses (e.g. an annual small business profit of $10,000 with an annual residential mortgage expense of $17,000), they will likely raise the suspicions of the IRS unless the discrepancy can be explained by other sources of income, said Rosenberg.

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