Avoid A Bad Tax Season Surprise With Bookkeeping Tips
Happy spring! Those of us in the accounting world are still hunkered down in the midst of tax season, but our eyes are on the fast-approaching April May 2021 tax deadline. Speaking of eyes, allow me to share a bit of what my eyes have seen this tax season. We’re talking about the dreaded tax season surprise.
We love working with clients, especially those we’ve been able to help by cleaning up their organization’s accounting in an effort to get them moving in the right direction. Most of the clients we start working with have little to no surprises when the time comes to turn over their tax returns – which is what you want in the world of tax season surprise scenarios. Or, if there are surprises, they are in their favor. The clients who come to us for last-minute help, on the other hand, are likely to be less happy about what we find and how these revelations can negatively impact their tax bill.
Keep reading to learn how you can get your bookkeeping – and your business – back on track to avoid a bad tax season surprise next year!
Business Owners Don’t Like Surprises
Surprises can be nice. A fresh bouquet of flowers, a delicious box of chocolates, a winning lottery ticket … some surprises we can’t get enough of. But if you’re a business owner who just received a surprise that will negatively impact your business’s cash flow, chances are good that those feelings of joy will be replaced by something a lot darker and more menacing.
How does such a mistake happen? Especially, when you’ve been diligently inputting your data into QuickBooks® and, when the time came to hand over your financials, you were actually showing a loss. Something doesn’t add up.
Well, the answer is pretty simple – user error. These unfortunate tax return surprises happen because either you or your bookkeeper inputs information incorrectly into your accounting software.
As business owners, we have a responsibility to take care of our business. And that includes understanding financial reports and the impact they have on the business. From day one when you started your business, your books should have (correctly) started too. Even if you weren’t born to be a bookkeeper, as a business owner, you still have a responsibility to maintain your accounting function. This means you may want to pick up a few classes, read a book on the subject, listen to podcasts or even watch a few YouTube videos to walk you through the process. Or, if you rather, consider outsourcing your accounting function and get as much of your bookkeeping off your plate as possible.
So, let’s get back on track, how do you avoid tax surprises? Where do you start? Well, the first step is understanding how your business is structured. Understanding this will tell you many things, as well as avoid some accounting pitfalls. Consider the following examples:
Annie’s personal business is an S corp. By being an S corp, Annie pays a salary to her husband and herself. This is a deductible expense to the business. It hits the profit and loss statement. These expenses reduce the bottom line.
If Annie’s business is a single-member LLC, it is taxed as a sole proprietorship. The wage that Annie takes is not an expense, so it does not hit her profit and loss. Therefore, it is not used to reduce her bottom line.
So let’s take out the magic wand and give it a little whirl. If Annie’s business is a single-member LLC, and she has expensed $60,000 worth of wages to herself. She will now, with our wand, of course, increase her bottom line by $60,000. We do this by moving the $60,000 from a payroll expense to an owner’s draw, which is a balance sheet item and not a deductible expense.
Understand Your Accounts To Avoid A Tax Season Surprise
One of the best tips I can give is to encourage you to learn and understand the accounts that affect your bottom line. At the end of the day, you’ll realize that the magic lies in the power of PROPER data entry.
Examine your chart of accounts in QuickBooks. End the anxiety of bookkeeping, by understanding the terminology. Take it a step further, and learn how it affects your business’s reporting and what those reports mean. Doing this makes the data entry simpler.
Check out this QuickBooks article that describes the different types of accounts. I hope this helps and always remember you can reach out to a member of the Rea & Associates’ accounting and bookkeeping team. Also, consider searching Google or YouTube for answers. If you haven’t in the past, you will be surprised by the wealth of information that’s out there.
By Matt Long (Wooster Office)
Looking for more accounting and bookkeeping tips? Check out this resource!
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