accounting

The Top Five Tax Return Mistakes and How to Avoid Them

The Top Five Tax Return Mistakes and How to Avoid Them

Written by Luke Frye

Okay, this is going to sound extremely biased... but, as an accountant, I strongly recommend hiring a professional to file your business’s tax returns.

Sure, you’ll have to part with some of your hard earned cash in the short term. But I guarantee it will save you time and headaches. And if it helps you avoid making costly errors on your tax return (y’know, the ones that result in IRS fines), it’ll also save you money in the long run.

That said, I’m aware that it’s not always possible to hire a pro. So, if you’re doing your own tax return this year, here are some common mistakes to avoid.

LLC vs S-Corp: What’s Better For Your Business?

LLC vs S-Corp: What’s Better For Your Business?

Written by Luke Frye

Can you save money setting up your business as an LLC? Should you elect to be treated as an S-Corp?

I get asked these questions a lot by clients who want to maximize their tax savings. I wish there was a one-size-fits-all answer. But the honest the answer is: it depends on a bunch of different factors.

Before you set up shop as an LLC or an S-Corp, here’s a quick rundown of how these two business structures can benefit you and your business.

Top Nine Tax Code Myths and How to Stop Falling for Them

Top Nine Tax Code Myths and How to Stop Falling for Them

Tax filing and small biz accounting are complicated at the best of times. So, as a CPA for photographers and creative biz owners, I spend a lot of time busting tax myths for new clients.

Here are some of the most common tax myths that trip entrepreneurs up. Avoid them all and file a better tax return this year.

How to Tell If You Need to Hire a Bookkeeper

Photo by Phung Hi

Photo by Phung Hi

In the early stages of running a business, it’s easy to get away with a hobbled together, spreadsheet-based bookkeeping system. But once your operation starts to expands, the financials tend to get more complicated or you have less time to manage all the administrative stuff. At that growing pain point, you’ll realize you’re in over your head and that it’s time to hire a professional bookkeeper.

There no set point that determines exactly when you should hire a bookkeeper. But the following symptoms will present themselves, making it more obvious that it’s time for you to bring on professional help.

 

You’re Always Behind on Your Bookkeeping

You’re always behind on your bookkeeping, so you never actually know the state of your business finances. It’s stressful and mildly infuriating that you don’t have this information. You’re discouraged from getting caught up because it feels like an impossible task. And if you’re never known the beautiful glory of not being behind, you can’t truly understand why this is important.

With proper bookkeeping, you know how much money your business made last month and all the months before it. You know how much your business spent and if you’re even making a profit. With a great bookkeeper, you receive your monthly financial reports on a regular basis.

Being and staying caught up on bookkeeping is literally a whole new world of clarity and understanding.

 

You’re Freaking Out At Tax Time

Tax season doesn’t have to be fraught with multiple, confused emails fired off from you to your accountant at 2 am. It also doesn’t have to be you printing out 200 pages of bank statements, using six different color highlighters and a calculator to figure out your profit and loss statement on your office floor. I promise you, it doesn’t have to be this way.

In fact, it should be a pretty smooth process. I know your accountant wants that too. Here’s how it should go down:

  1. If you’re like most businesses, your accounting period will close along with the calendar year on December 31 and you close out your bookkeeping for the prior year sometime in January.

  2. You send your financial reports and all your other tax documents to your accountant and they file your taxes for you.

  3. If you owe taxes, you already knew you would because you were keeping your books all year long and you saved for taxes as you earned income. Or you get a refund, yay!

Tax season isn’t stressful if you go into it being prepared. And being prepared is something totally within your control.

 

Your Accountant Does Your Bookkeeping

You might think you’re a genius for forgoing monthly bookkeeping and having your accountant haphazardly put together your books right before tax time, but here are the pitfalls of this strategy:

  1. You aren’t watching your business finances month to month, so any business decisions you’re making aren’t rooted in actual data. For example, can you really afford to hire someone? Or does it make sense to stop offering a particular service because it’s not as profitable as other services?

  2. You’re probably spending more having your accountant do your bookkeeping since accountants tend to charge more per hour.

  3. Your bookkeeping probably won’t be done in as much detail. This is fine, until it isn’t. Meaning, sometimes when you realize you need the data, you realize you don’t have it - like during a small business loan application or when you’re trying to understand the value of your business because you’re going to bring on a partner or investors.

 

What To Look For

So now that you know you need a bookkeeper, what are the qualities you should look for in a bookkeeper or bookkeeping firm?

 

Clear Communicators

A good bookkeeper can effectively communicate with your accountant and you. They should be able to explain your financials to you in plain language.

 

Accurate and Timely Delivery

You should be receiving your financial reports in a timely fashion so you can use the data to help you make decisions. A timely delivery is receiving your financial reports no more than two weeks after the close of the month. If you don’t receive reports for months at a time, you’re flying blind.

Your bookkeeper should work with you to make sure your reporting and categorization is accurate. They should make sure your bank balances match and they’re taking your accountants advice into consideration.

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When it’s time for you to upgrade your from DIY to a professional bookkeeping solution, check out our guide to help you understand your options.


 

How to Catch Up On Your Bookkeeping

Photo by Wes Hicks

Photo by Wes Hicks

 

Staying up to date with your company’s bookkeeping is an uphill battle. When I first started my business, I didn’t update my books for a handful of months - nine, to be embarrassingly honest. As more time passed, more work added up and my fear of tackling it all grew to a critical mass. When I finally sat down to do all the work, I cursed myself and promised myself I’d never let me books get that out of control again.

I’m sure as tax season closes in many of you might also be filled with this same sense of dread. If that’s the case, worry not. Although we offer catch up bookkeeping over at Hell Yeah, Bookkeeping, there are lots of small business owners who prefer to handle bookkeeping on their own. If you’re in the latter camp, here’s a step-by-step guide to help you get your caught up on your bookkeeping. Let’s dig in.
 

 

Step 1: Sort and Organize Your Documents

The first step is getting organized. You’ll want to start compiling invoices you sent to customers, receipts and/or the bank and credit card statements where you made purchases that are business expenses.

 

Invoices

Find all the invoices you sent to clients and organize them in one place. Make a note of what invoices are still outstanding, if any. The invoices and their status (paid or unpaid) will help you compile your business’ income or revenue and your receivables (what’s owed to you).

But of course there is a caveat. You’ll need to know what accounting method your company uses to operate. The two methods here in the U.S. are cash and accrual. Most businesses operate on a cash basis. If you don’t remember, you can ask your accountant to confirm.

For a cash basis business, you technically only need to send the customer an invoice once they have paid. For accrual accounting, you record the income when the sale occurs.

For example, let’s say you made a sale in the amount of $1,500 in December 2018, but the client didn’t pay you until March 2019. With cash method, revenue isn’t recorded until March 2019, whereas with the accrual method, you’d record the sale in December of 2018.

 

Collect on Debt

Sometimes you’ll have invoices that are outstanding for a long time. At some point, you might need to cut your losses. In order to do this, you must first make a concerted effort to collect on the debt. If that doesn’t work, you can charge off the debt using accrual accounting or non-accrual experience method. I know, the names of these methods really just roll off the tongue, huh? 

For accrual accounting, when a customer flakes on their obligation to pay you, you’re able to write off this off as bad debt expense. Remember, you’ll need to prove to the IRS that you took reasonable steps to try to collect on the debt and recover the loss. The specific charge-off method means you can deduct a specific bad debt that becomes partly uncollectible during the year.

You can use the beautifully named, nonaccrual experience method to deduct what you were unable to collect. The deduction would reduce your gross income for tax purposes.

 

Separate Business and Personal Expenses

Most accountants will tell you that they prefer it if you’d keep receipts for every single business expense. Of course, this doesn’t always happen. But most accountants will advise that you should still deduct legitimate business expenses even if you didn’t keep the receipt.

At any rate, gather all your receipts for your business expenses and organize them in one place. I like to scan everything to Google Drive or Dropbox. I also like to include the date of the expense in the title of the scanned file so it’s easy to reference the receipts by date.

Here’s one hack that has made keeping meal receipts especially easy. I set up an email account, something like pacosreceipts (at) gmail.com. And every time I do business over a meal, a drink, or a coffee, I simply snap the picture of the receipt and email it to that email. In the subject line, I write who I was with and what the meeting was about. With this method, I have an audit trail that was kept in real time. This is important to the IRS if you ever get audited. They would like to see a real-time record as opposed to a spreadsheet that you threw together on one day of the year.

 

Vendor Invoices

If you’ve paid vendors and contractors, you should make sure that you’ve got all these invoices and bills organized in case you need to access them for an audit. If you don’t have all your bills, you can simply reach out to your contractors and vendors and ask them to send you whatever you’re missing.

 

Step 2: Update + Reconcile Bookkeeping

Now that you’ve gathered everything together, it’s time to get into your bookkeeping software updated and reconciled with your bank accounts. Bank account reconciliation is when you make sure your accounting records match your bank and credit card statements exactly. Each transaction in your account should be categorized and entered into your bookkeeping software. It sounds redundant to replicate your banking records within an accounting software program, but the software can allow you to run reports that your bank doesn’t. Reconciliations ensure your records are accurate.

Make sure to spend the time needed to ensure your accounts are accurately reconciled; it may be costly to have a bookkeeper or accountant go back and fix your books if they aren’t.

 

Alternatives 

Hire A Bookkeeper

If you don’t have a bookkeeping system, you have a few options. First option is to hire a bookkeeper to put your books together for you. This method will likely result in the most accurate records, saving you time, but costing you more to pay for someone else's time and expertise.

 

Use Your Statements

One method to add up all your expenses is to use the bank statements and credit card statements where the transactions occurred. For any expenses that were cash, you’d have to add that back in after. This method is super easy if you’ve kept your business and personal expenses separate. It’s not recommended for a long-term solution because you won’t be able to accurately and quickly generate financial reports.

 


Use Your Receipts

If you saved all your receipts, another method is separating your them by expense category and adding up them all up. Again, this is not a long-term solution or long-term bookkeeping alternative. It’s only a very small, limited picture of your company’s finances.

 

If you'd prefer to outsource all of the bookkeeping work and your feeling of existential dread, please get in touch, we'd love to help.

What Is Year-End Tax Planning? (And Why You Need It)

If you've never had an year-end tax planning meeting with your accountant it could be because you have a very "easy" tax situation. For example, you're a single, renter who has a salaried job, with no side hustles or dependents. Easy. You don't really need a tax planning meeting because you're paying taxes as you earn your income.

Accounting 101: A Primer for Small Business Owners

Accounting is a process of sorting financial data. Through sorting the data, the accounting process creates products. The products are reports. These reports are useful to the  management team, business owners and shareholders or investors. The reports also play a pretty vital role in helping your accountant file your taxes.

How to Tell If Your Business Is Doing Well

You don’t need to do a lot of digging to determine whether or not your business is doing well. You can feel it by just observing the day to day operations. When you’re able to pay all your bills, pay yourself and your employees and you have money left over in your business, it’s pretty obvious that things are going pretty swimmingly.

But instead of flying by the seat of your pants or letting your socials statistics determine the health of your company, let’s observe some factors that will allow actually you to determine the health of your business. There are a variety of measurements to choose from. They range from simple observations to more complex ratios.

How Your Invoicing Impacts Your Cash Flow

I've worked in financial service since I was in college. In fact, my very first job was as a collections agent for a big, evil bank. For four hours a day, five days a week, I'd sit in a call center in suburban Southern California with a fugly headset on, connected to an automatic dialer. I would speak to people who were past due (bank speak for late on making a payment) on their auto loans. The majority of the time the person on the other end of the line just spaced and forgot to make their payment.

The bank had entire department dedicated to closing the gap between revenue that was owed to them (AKA receivables) and cash. The gap is entirely created because of how, when or if a customer will pay their bill or invoice. As a small business owner, you probably experience the drawbacks of this gap like not being able to pay your vendors or yourself or your other bills. But there are things you can do to help minimize the gap. This is called managing your cash inflow.

Do I Have to Pay Taxes on Side Gig Income?

One of the first concepts I learned while studying economics is a phrase made popular by the economist Milton Friedman: "There is no free lunch". An Econ professor once wrote it on the white board in all caps and it's stuck with me ever since.