Tax Deductions and Business Expenses

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The year ends in only 9 weeks, if you’re like most sole proprietors, December 31st is your fiscal year end, and you need to sort through your receipts, and make your preliminary income tax calculations for this year. But are you maximizing your small business tax deductions?

The first rule for maximizing your business income tax deductions is to have all your business-related receipts. The IRS insists that all of your business expenses need to be backed up with receipts, so you have to collect them (and keep them, as the IRS may want to look at them sometime).

Keeping track of all of these receipts throughout the year is the most difficult part of preparing to do your income taxes, in my opinion. Training yourself to always ask for a receipt, no matter how small the purchase will get the process off to the right start.

You should also train yourself to look at your receipts when you first collect them, and make sure the receipts show what they’re for, as well as having a legible vendor’s name and date. Illegible or incomplete receipts are a nightmare when it comes to inputting the receipt data into whatever record-keeping system you’re using for accounting purposes – especially if you or your bookkeeper are trying to figure out what an incomplete receipt was for and record it months after the fact.

Getting into the habit of looking at your receipts as you collect them and making sure they contain all the required information in a legible fashion is a vital first step in maximizing your business income tax deductions.

Having (ahem) all my required receipts and tax-related documents in some semblance of order, here’s my list of business expenses that I’m checking twice to get ready for income tax time. Depending on your habits this past year, some of this advice may fall into the category of resolutions to follow this year so you can reap the benefit on future income tax returns.

But first, there’s this tax year to get through. Let’s look at how to apply some specific small business tax deductions to your income tax, starting with the cost of doing business.

A Simple System For Keeping Your Receipts Organized

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By Susan Ward, About.com Guide

When I first started my business, I knew that I had to keep all the receipts I gathered if I wanted to be able to deduct business expenses on my income tax. So I did – stuffing all my business receipts into a drawer of my desk.

This was a fine system until the time came to do the bookkeeping, and I bitterly discovered that having a disorganized mass of receipts was almost as much trouble as having no receipts at all.

Over the years I developed a much better filing system for receipts, a filing system that makes data entry easy and allows me to retrieve a particular receipt with some hope of success if I ever need to go back and find one.

What I do to keep my business receipts organized is keep a series of file folders labeled by month and year, such as “Receipts November 2003”. The two most current file folders sit on top of my desk, so when I collect receipts on my various rounds, it’s easy for me to pop them into the correct monthly folder.

Then when I do my monthly data entries, I take the appropriate monthly file folder and sort the business receipts into piles based on their income tax classifications. For instance, I paperclip together all the software receipts, all the food and entertainment receipts, and all the automobile-related receipts.

When I’m finished entering the data, I put the receipt folder of the month in the appropriate place in a drawer of one of my filing cabinets. As you know, you have to keep business-related receipts for six years, so I have several drawers full now, but at least the receipt folders are easy to find if I need to review any of the information!

My filing system isn’t perfect, but it makes it a whole lot easier to enter the monthly receipt data and gives me a whole lot less paper to sort through if I actually have to go looking for a receipt later.

Bookkeeping help for small businesses

To get help with bookkeeping visit www.insourcebooks.com

Even though it might not be the most glamorous aspect of running a business, bookkeeping should always be near the top of your to-do list. The very life of your business depends on your diligence in this area.

Every business, regardless of size, even if you work from home and you are your only employee, has to keep a detailed record of its financial activities in order to comply with the tax laws. The activity of making and maintaining these records is known as bookkeeping.

For small businesses, accurate and diligent bookkeeping is necessary. It not only establishes compliance with a number of IRS regulations and bank lending rules but also improves your ability to make operational decisions.

So where do you start? Here are a few basics to keep in mind when setting up a bookkeeping system. Follow this advice, and the numbers will work for you, rather than the other way around.

Get help.

If you’re like most small business owners, you lack both the time and enthusiasm to keep a detailed ledger. Accordingly, find a good CPA in your area or take advantage of bookkeeping software to make your life easier. A simple rule is that if your business is operationally complex, dependent on precise and timely records, or large, you should definitely engage professional help. Do you have a considerable inventory? Do your employees perform billable work on client sites? Do you expect to do $100,000 in sales this year? If the answer to these questions is yes, don’t wait to get bookkeeping help.

Capture financial data.

Whether you decide to use a professional or use Quickbooks on your own, Make a habit of holding on to everything: sales receipts, purchase orders, bank statements, etc. Create a dedicated filing system for every type of financial data. You can scan in files to keep them electronically (sometimes old receipts fade by the end of the year.)

Put financial data to work for you.

Do you know how much you spent on office supplies last month? Can you estimate how much business tax you’ll pay next quarter? Can you forecast sales? Can you generate a list of non-paying customers? The answers to these and related questions come from categorizing the data you capture. Fortunately, this is where software can help. Small business-oriented tools such as QuickBooks, Peachtree, and Microsoft Office Accounting Professional will do the heavy lifting of categorization and prediction for you. This helps your bookkeeping to go beyond administration and begins to offer your business insights that can speed up your cash flow, grow your revenues and better inform your decisions.

Handle the IRS.

The IRS likes records, paper trails, and audits; so should you. Certify all mail to the IRS, request return receipts and keep the correspondence record accessible in case of a dispute over your bookkeeping practices. Contact a local taxpayer advocate (http://www.irs.gov/advocate/content/0,,id=150972,00.html) in case of intractable disputes.

Leverage your books.

Good bookkeeping gives you credibility. Use it. Remember important audiences (such as banks and other credit sources) who may not get excited about your company based on its products or services, but who will be won over by a carefully-documented record of financial success.

Stay close to financial data.

Employing a CPA or delegating bookkeeping to an employee doesn’t give you an excuse to separate yourself from the financial details of your business. As the owner, you are legally and professionally responsible for your business activities. You needn’t spend hours every day poring over the books, but always have a big-picture idea of where the financial data is trending. This is another realm in which bookkeeping software can be advantageous, because it can give you custom views into your financial records. Using such software, you can decide to run and refresh basic reports every day, so that you can see important data captures (such as profit and loss, overdue accounts and monthly expenses) at a glance.

Ensure data validity.

Quickbooks and the assistance of hired help only go so far. Sometimes you will be the only person who can ensure the validity and timeliness of data. If an important customer’s address changes, record it immediately in your bookkeeping system. Read through your vendor list to make sure that one vendor isn’t listed by two names. Performing these small but vital acts of diligence, and training your employees to remain similarly alert, requires you to adopt a detail-oriented way of acting.

The devil of bookkeeping is in the details. Approach these details with a keen focus, and your bookkeeping will reveal crucial information about your business’s health and vitality. Attention to financial details pays off, in both the short and long terms.

Can the IRS audit my quickbooks file?

If you have incomplete books then you need to resolve them before the IRS comes calling. Visit www.insourcebooks.com today for your free consultation.

The IRS has been training revenue agents on how to use QuickBooks, and they may request your QuickBooks company file as a part of an audit. What does this mean to accounting professionals and their clients? This has been a hotly debated topic – let’s take a look at the facts.

Internal Revenue Code§ 6001 requires a taxpayer to maintain books and records that substantiate income, deductions, and credits, including adequate records to substantiate deductions claimed as trade or business expenses. Along with loss of deductions, negligence penalties may also be assessed if a taxpayer has failed to maintain required copies of historical records to substantiate a tax return.

Revenue Procedure 1998-25 states in part:

“(2) A taxpayer with assets of less than $10 million at the end of its taxable year must comply with the record retention requirements of Rev. Rul. 71-20 and the provisions of this revenue procedure if any of the following conditions exists: (a) all or part of the information required by § 6001 is not in the taxpayer’s hardcopy books and records, but is available in machine-sensible records; (b) machine-sensible records were used for computations that cannot be reasonably verified or recomputed without using a computer (e.g., Last-In, First-Out (LIFO) inventories); or (c) the taxpayer is notified by the District Director that machine-sensible records must be retained to meet the requirements of § 6001.”

A too-quick read of those words would focus on the $10 million cutoff and skip over the qualifications. But the IRS web site states (see Q6):

“Revenue Procedure 1998-25 does not exempt a taxpayer from providing electronic records, if such records exist.”

If the IRS calls and wants to audit your electronic records, you can just export the 1 year they are interested in. You need to keep the file in tact!

The IRS says, in a FAQ page:

“If the taxpayer or representative creates or reconstructs a new company file, for example, by re-inputting the transactions for only the year under examination, this new file does not satisfy the requirements or needs of the IRS. The new or modified company file is not a copy of the books and records of original entry. The altered electronic file would not meet the requirements of the Information Document Request or a summons and the taxpayer’s representative could be in violation of Circular 230.”

Making Attainable Goals

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You may want to start out your home bookkeeping project by devising a list of goals that you would like to meet. You may find that having present-day, short-term (5 years or less), and long-term will help you to more easily break down the tasks. It also makes it more manageable, because it will allow you to divide up your various needs so that you can see how much you will need to set aside every month for each goal.

If you are overspending every month, and using credit cards, then you are headed into a frightening financial area that is not sustainable. It will help if you see where your money is going by looking at your spending records for a couple of months. With the help of software, you may be able to create charts and graphs that will help you to visualize the present habits that are undermining your efforts to save money.

source: bookkeeping.net

 

Home Bookkeeping

For more bookkeeping and accounting help in Rochester NY, Syracuse NY, or Buffalo NY areas please visit our site www.insourcebooks.com

Home bookkeeping may sound incredibly complicated and even daunting. It is actually a great way to help yourself out financially. When you know where your money goes out or how you make the most money, you can start budgeting in a way that works with you and your family. Look to make a home bookkeeping system that makes tracking everything easy to do. Whether you are having one of those years that is chock full of surprise expenses, or trying to navigate away from poor spending habits, then you may benefit from the best bookkeeping systems at your home.

Having a Quickbooks program that integrates your banking and credit card information takes a great deal of pain out of the chore that many assume walks hand in hand with home bookkeeping. When you are not having to transfer the information for yourself, then you are also avoiding clerical errors that may occur when you type in information for yourself. Plus, it also saves you time from having to visit various sites to pull up your banking, credit card, mortgage, and investment records. With so many sites to visit, there are just as many passwords and usernames to keep track of as well. That in and of itself is a chore enough.

source: bookkeeping.net

Bookkeeping Options

For more bookkeeping and accounting help in Rochester NY, Syracuse NY, or Buffalo NY areas please visit our site www.insourcebooks.com

Many owners hire an accountant or a bookkeeping professional to manage their books for them. But some cannot afford this luxury. There are other options for those who do not wish to hire an accountant or who cannot afford one. Most community colleges offer courses in basic bookkeeping. Many companies who do most of this work themselves do it manually, but more and more are choosing to add computerized bookkeeping software to the mix. Desktop accounting and bookkeeping software simplifies the process and helps the user make entries into computerized ledgers. There are even options for double entry accounting for those who are interested and have a need. Most of the computer programs are capable of helping the user to set up ledger accounts, post entries to those accounts and create and print financial statements on demand.

These days, managers and owners can also find many online options for keeping track of financials. Online based applications allow multiple users from different machines to access and input data. These options use secure servers for the storage of data. Users access those servers by entering a password and username. But these options lack in the critical area of accountability.

One of the main purposes for bookkeeping is cash flow management. Making sure you are on top of your books helps you ensure you have the necessary cash flow to support the day to day activities of the company. Many of the most popular computer and online accounting systems and bookkeeping software support the kind of analysis that allows you to stay on track and to maintain adequate cash flow to keep things moving forward.

Some companies choose not to hire out bookkeeping services because they do not feel that it is something they can afford financially. But the truth is that a talented and dependable bookkeeper ought to actually help you increase your cash flow and create more breathing room financially for your company. Learn more about bookkeeping software and bookkeeping professionals and how these steps can help make your business more successful.

source: bookkeeping.net

Advantages of Good Bookkeeping

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Bookkeeping does not directly contribute to the profits of a small business (although some bookkeepers would argue otherwise), but the work of bookkeepers is extremely important to the financial well being of companies. The services of a bookkeeper help the books to stay organized and to remain up to date. There are many other important reasons to make sure bookkeeping is done right.

For one thing, if you hope to borrow money for a venture, you need to have solid bookkeeping records. Lenders will expect to be able to take a look at them and analyze a business’ solvency before granting loans. Bookkeeping professionals thus are charged with work that not only keeps track of the money you have, but also may determine whether you’ll qualify for money in the future. Companies that rely on outside financing to survive must regard this as the top reason to focus on organized bookkeeping.

Accurate bookkeeping also generates the data owners and managers need just to manage their companies on a daily basis. Up to date general ledger details will indicate accurately which customers are past due on the monies they owe and which ones are carrying balances on their lines of credit. Without this information, the financial arm of business is hamstrung and cannot respond effectively to patterns of late payments or nonpayment by customers. And these losses over time will eventually hamper companies’ ability to even stay afloat.

Businesses also use these bookkeeping ledger accounts to determine how they are doing financially. They can see if their gross profits are in line with projections and if the prices they are charging for their services and products are sufficient to cover their costs. Without this important data in your bookkeeping, it could be very easy for cash flow problems to pop up at your company. This same principle applies to tax work as well. An accurate sense of income and expenditures is needed for companies to accurately figure their tax liabilities to the IRS. Good record keeping ensures reduces the chance of an audit and helps ensure that you’re prepared for one if it does occur.

source: bookkeeping.net

Definition of bookkeeping

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Bookkeeping is one area most small business owners would love to forget about. Unfortunately, some of them actually do forget about it, resulting in mad scrambles for receipts and other financial information at tax time and the close of fiscal year. The trouble typical business owners have with bookkeeping is the time and effort involved. In small business settings especially, owners are so wrapped up in attending to every other aspect of running the day to day operations of the company that there is simply no time left over for bookkeeping. Inadequate bookkeeping is often the product of overworked entrepreneurs. But in spite of the fact that it gets ignored completely so often, this area of small business financial management is among the most critical.

To understand the importance of bookkeeping in business finance, it is good to take a look at its definition and provide some background information on the matter. Many company owners and self employed entrepreneurs avoid things like debits and credits or journal entries like the plague. But this attitude only ends up costing them money in the long run, meaning they have to work even harder to keep up simply because they’re robbing themselves of cash flow that could be gained with greater efficiency.

Bookkeeping is something no company ought to ignore. As a matter of fact, it’s an area that can’t be ignored for too long without major financial repercussions. To get a sense of why this is so, we need to look at what it means to keep the books and how this works impacts the operations of a company.

A simple bookkeeping definition might go something like this: bookkeeping is the recording of the financial transactions of a business. In accounting terms, it is the very first step in the whole bookkeeping process. If this step is not attended to, things like paying taxes can become a real challenge. When bookkeeping is done well, the accountants have the ability to perform reporting, classifying, and analyzing a company’s financial data as well as these other tax related activities. Without accurate and detailed bookkeeping efforts, it is hard to know what kind of financial shape a business is in. Owners can’t really devise long term plans or set goals without a sense of the direction things are going financially. So, accurate bookkeeping is essential to a company.

Bookkeepers have many responsibilities, some of which may vary depending on the situation. In some cases, paid bookkeeping professional do only some of this work and give the owner the raw data needed to do the remainder of the bookkeeping. In any case, their job typically consists of organizing and tracking receipts and making sure expenses are properly noted as soon as purchases are made. Bookkeeping involves tracking canceled checks and other records that are created as a result of transactions by the company. They record transactions in a chronological fashion, whether cash disbursements or sales, and keep them all in a journal. Bookkeeping then takes these journal entries and places them into a general ledger of accounts. Often accountants take over from there and use these account records to prepare monthly statements for the company.

source: bookkeeping.net

7 Ways to Reduce Entrepreneurial Risk

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When I first quit my job and launched a company, I was 23.  I thought I was invincible.

 

When I sold my first company, I was 28.  I thought I was unstoppable. In fact, I actually believed that entrepreneurs take risks to earn their rewards.

 

Now I’m 40-something and on my fourth business venture. And now I know better.

 

Nothing is unstoppable. No one is invincible. For me, entrepreneurship is no longer about taking risks. It’s about understanding and managing them.

 

More than any other person, an entrepreneur must acknowledge and minimize the risk in his or her life.  How?  Here are seven absolutely mandatory methods that I think every entrepreneur should use to manage risk:

 

1. Diversify your income.  I have multiple streams of income. Like writing this blog. And rental property. It ain’t much, but in case my business goes south, I have lots of other revenue sources that I can count on.  It’s an essential diversification strategy.
2. Save more money.  There have been years when I’ve lived on less than a preacher’s salary.  Much less.  When you build a business, there is nothing more comforting than having a savings account to pay the rent.  When times are tough, I use it. When times are good, I replenish it.
3. Take the home-court advantage.  Whenever possible, I stick close to my family.  Through thick and thin, nothing sustains you like kin.
4. Plan obsessively.  I never start a business without a business plan. Scoff if you want, but an ounce of market research is worth a pound of bankruptcy advice.
5. Forecast obsessively.  Surprises are for birthdays.  If I’m going to run out of cash, I want to see it coming from a mile away.  Forecasts give you time to zig when the markets decide to zag.
6. Work harder and smarter.  A 9-to-5 lifestyle is not part of the deal when you’re an entrepreneur. I maintain my work-life balance by taking a few months off after I sell a company – not while I’m building it.
7. Insure yourself against everything.  I have insurance out the wazoo.  I’m insured against fire, disease, death, dismemberment, and disaster.  My home, car, and property are all insured.  I even have an insurance policy for my insurance policy: It’s called an “umbrella policy,” and it adds another million bucks to my coverage in case the worst strikes.

 

Building a business is hard enough. Don’t make it harder on yourself by taking unnecessary risks.  Open your eyes to the risks in your life, then neutralize them any way you can.  Have you thought of some other ways to do this? Leave me a comment below!

 

Dedicated to your (risk free) profits,
David Worrell

Source: http://www.allbusiness.com/7-ways-minimize-risk/16672670-1.html#ixzz1Y7Qa9aL5