Yes, you need a receipt

It’s that time of year... tax season is upon us! For many small business owners, that means it’s time to gather receipts from the various places you may have stashed receipts throughout the year. Trust me when I say that bookkeepers and tax preparers have seen it all, from the highly organized and fully documented receipt files to the completely unorganized box full of relevant and irrelevant papers.

Why do receipts matter so much? If you’re deducting expenses for your business, your chances of being audited automatically increase. While the overall chance of being audited is relatively small, the chances increase based on specific criteria, such as sole proprietors who file a Schedule C with their tax return.

Receipts are your proof that a valid, deductible business expense occurred. Your credit card statement isn’t enough, as it doesn’t provide all the necessary information. In fact, even the receipt alone isn’t enough if audited-you also need documentation of who you met with, the purpose of the meeting, and so on.

Whether you’re gathering receipts for your 2017 tax return or documenting them along the way for 2018, here are important things to document for each business expense.

Date and time

Date and time seems pretty simple to capture from a receipt, but it’s not always listed on every receipt. When you incur a business expense, check the receipt to ensure the date and time are printed on the receipt. If not, write it on the receipt before filing the receipt or submitting it to your bookkeeper.

People involved

The IRS has very specific rules surrounding meals and entertainment expenses for business deductions. If your expense involves a meal or other entertainment (such as sporting event), it’s critical to document who attended the meeting or event.

And no, setting up shop at the local Panera and working for a few hours while you eat breakfast doesn’t count as a deductible business expense. It can be an expense the company pays for, but it isn’t one you can deduct on your taxes.

Purpose of meeting or expense

It’s also important to document the purpose of the expense. Why did you need 100 pens? What business topics were discussed at that lunch meeting? How much business did you conduct on that trip to Florida? If audited, the IRS will expect documentation on what business topics were discussed or how other items were used for your business.

The best practice for all business owners is to write these details on the back of a receipt at the time of purchase and then file them in a specific place so they’re easy to find come tax time next year. You’ll need the receipts to enter into your bookkeeping software, but you’ll also need to store them for several years in case of an audit. The more organized you are with your receipts, the easier it will be to prepare taxes and respond to an audit.

Three tips for working with a bookkeeper

There are many different ways we work with clients, and the same is likely true of many accounting or bookkeeping companies. I’ve often had companies ask me if I can provide a specific level of service, but they don’t realize that there’s still some level of involvement or input required on their part.

For small businesses looking to outsource their books, here are some important things to keep in mind as you start working with a bookkeeper.

Identify the desired level of support

Over the years, I’ve worked with some clients who simply needed periodic consulting about their bookkeeping setup. I might meet with them a couple of times to work through an issue, and then I might not consult with them again for six months to a year.

But the more common scenario is either a client who wants some monthly support with entering expenses and income, and keeping the books on track, or one who wants even the day-to-day bookkeeping tasks handled for them, such as making deposits and paying bills.

And sometimes, clients need a complete overhaul. I once had a client who had two different systems for tracking their accounts, and the two pieces together didn’t add up to 100%. Sometimes in those situations, the best course of action is to start fresh, but your bookkeeping consultant can advise you on that.

Recognize your role in the process

Even for those clients who ask me to handle all the details, the client still has to be involved in the process. After all, it’s their business!

The extent to which a business owner is involved will vary a bit depending on their history with bookkeeping and what program and process they use. But even those with a great track record for keeping things current will still need to communicate with their bookkeeping or accounting partner.

Find a consultant you trust

You’re handing over significant details about your business, so it’s important to find a partner that you trust. For most people in the field, numbers are numbers, whether it’s a $20,000 business or a $5 million business. But for the business owner, those numbers can be very personal, and it may be hard to give someone the level of access needed to help.

Before you contract with a bookkeeping consultant, have some honest conversations about your current situation and how you want them to help. If your books are out of control and you need someone to get them in order, expect to spend time answering questions and adapting to new processes. Keep in mind that a good bookkeeper is going to nag you for receipts-it’s their job!

No entrepreneur woke up and decided to go into business so he or she could do bookkeeping on the weekends after providing a product or service all week. It’s not uncommon for small businesses to get behind, but hiring a professional to help with your books can keep you on track and in business.

The best way to give gifts to your employees

Showing appreciation to your employees for their dedication and hard work is vital within a company. It’s a key factor in employee morale, which is important for the ongoing success of your organization.

But how does an employer know whether a gift to an employee is taxable? This is where de minimis comes in to play, which roughly translates to “about minimal things.” Under this concept, an employer can do something for an employee-such as a small gesture of appreciation-without it being taxable.

For instance, if you gave $5 Sonic gift cards for the first three people who made a suggestion on improving the parking lot, that likely would not be taxable. It’s a small way to show appreciation and have fun, but it’s not considered a cash equivalent.

However, using larger or frequent cash gifts can get you into trouble quickly. Giving out cash to employees adds up, and the total amount must be tracked and taxed. For instance, I had one experience where a boss wanted to give all employees cash to buy their turkey for the holidays. The company made the wise decisions to instead buy the turkeys and hand them out. Although that took more time, giving the employees cash would require completing a W2.

If you’re debating whether to give a tangible gift versus cash, you’re usually best to go with the actual gift and not the cash.

Gym memberships are another place where the question of taxable income comes into play. It’s not a traditional gift, but it is an employee perk. An on-site fitness center can be a huge benefit for employees, and a lot of larger companies are offering that as an option. If the gym is on-site and available for all to use, it counts as a company expense. In contrast, if you paid for an outside gym membership for employees, then it becomes taxable income.

Some other things that are included in de minimus are:

  • Occasional use of the photocopier
  • Occasional snacks, coffee, doughnuts, etc.
  • Occasional tickets for entertainment
  • Holiday gifts
  • Flowers, fruit, books, etc., under special circumstance

The idea is to take care of your employees who work hard for the company and keep morale up while being financially responsible for the well-being of the company. Make sure you think ahead about employee gifts and the potential tax impact.

Why your company needs a CEO and CFO

When talking about the difference between CEOs (chief executive officer) and CFOs (chief financial officer), it’s often about the details. A lot of times it is harder for a CEO to catch smaller details.

Now, in their defense, they are coming up with strategic methods to sustain the growth and well being of the company, which includes everything from administration to sales. That in itself is a huge job, which is why they are the CEO.

CFOs report directly to the CEO and typically handle any financial happenings within the company. Their responsibilities include tracking revenue and expenses, analyzing financial data, and looking at the markets. Also a huge job, but the two jobs are very different.

The CEOs job is to see the big picture. Which means they can sometimes miss the importance of smaller details. For instance, it may not occur to the CEO to keep receipts. And believe me, the IRS wants receipts. They will not just take statements.

Those smaller financial details that really add up in the end are where the CFO shines. CFOs generally have a better understanding of details because they oversee budgets and expenses and also play a role in filing taxes.

For them, the i’s have to be dotted and the t’s must be crossed. The main responsibility they hold is the stability of the finances and implementing financial strategies to grow the company.

A CEO should generally have some knowledge of those details to understand the bigger picture of the business. And a CFO should look at the broader picture to better understand the details. A successful business needs both perspectives.

Although different, both a CEO and CFO carry the responsibility to maintain and improve the company. It reminds me of a leadership quote by Peter F. Drucker: “Management is doing things right, leadership is doing the right things.”

Both the CEO and CFO perform critical functions that require working in synergy to create a thriving and financially solid company.

I messed up, now what?

Most business owners have had that moment when they realize they messed up, whether it’s a small oversight or a big issue.

My title here is “accounting crisis manager” so believe me, I see this a lot. You are not alone- everyone makes mistakes. It’s how we recover that is important.

There is no shame in making mistakes. We just need to take a deep breath and switch gears into recovery mode to move onward and upward.

One issue I see quite often that can get businesses in financial trouble is not outsourcing the work or outsourcing the work to the wrong people. In other words, just because your cousin can handle checks doesn’t mean you need to give them the job. On the other hand, if you have a professional bookkeeper, you should trust them to do their job but still maintain oversight.

People tend to feel a sense of shame for not understanding every part of their business. Just remember that to build a successful business, you will need to lean on other people. When an owner gets busy, and they will, shortcuts tend to be taken. This is where I see clients get into trouble, and it’s why outsourcing is so important.

Businesses can go through ups and downs for numerous reasons. Recessions, decreased demand of the products, and high unemployment rates can all affect the company’s revenue.
If you’ve hit tough times financially, some of these steps could help you bounce back.

  • Charge more for the product
  • Add fees, especially in service industry
  • Sell any assets you are no longer using
  • Reduce expenses
  • Get advice from a professional
  • Keep moving forward
  • Be flexible

I don’t mean to sound like a pessimist, but you really do want to plan for the worst as a business owner. It’s important to understand that potential loss and disaster are looming, and the better you prepare, the faster you will bounce back.

You can prepare and help strengthen your business with these steps.

  • Take a complete inventory of your business regularly
  • Ensure bookkeeping is up to date and correct
  • Back up your data and use up-to-date software

Remind yourself that those who have experienced great success have also experienced great failure, too. Find a solid and trusting support system, plan your course of action, and be prepared to build yourself and the business up again.

Helpful steps when starting a new business

When starting a new business, many questions arise. One I often hear is, "Where do I start?"

Well, start with giving yourself a pat on the back. You are braving the entrepreneur world, and that alone is a lot to be proud of! But going back to the question... where do you start?

Picking a name for your business can be not only fun, but also a way to reach the consumer. Pick a name that is direct and that appeals to the market.

If you want to be taken seriously in the business world, you will need to start with getting a tax ID number. This first step will establish the company and help guide the future of your business.

It's also important to decide what kind of business you are. This can always change as your business demands it, but think about where you are now and where you want to be in five years. Are you a sole proprietor or do you plan to partner with another person? Are you the only employee, or do you plan to hire a team?

Forming an LLC is a smart decision, regardless of the size or structure of your business. This gives the business a level of protection between your company and your personal assets. Nothing is 100% guaranteed, but it gives you a safety net.
With all of that complete, you should set up a bank account using the tax ID number and the company name. It's important to keep your business finances separate from your personal finances, and an established business checking account is a critical piece.

Also be sure to look into local laws and apply for any required licenses or permits. Commercial insurance is a good idea for most businesses as well, and a requirement for some fields.

The next logical step is everyone's favorite-bookkeeping! In reality this can be difficult and time consuming for many business owners. Quickbooks is a great software for managing business finances. With assets, liabilities, owners equity, income, and expenses being thrown at you, it's a lot to keep straight. Creating categories and sub-categories within your financial software will benefit the company in the long run. Organization is your friend!

Last, but certainly not least, find others who have ventured before you in the business world. Lean on these people, seek advice, find out what mistakes they have made, and what they did right. With an open mind, these people will guide you into the business owner you want to b

When things don’t fit in the box

When tracking your finances, most everything fits in a specific box: cash, balance sheet, inventory, fixed assets, accounts payable, loans, and capital investment. But there are some things that don’t fit in a specific box, like rewards or rebates. And other things can get confusing as to what goes where, like differentiating between business and personal expenses.

Let’s look at a few examples where things can get confusing and try to clarify how you should handle these.

Rewards points

If you receive rewards points via a credit card and apply it to your balance, you’ve reduced your liability, but something still needs to be credited. Since everything should be accounted for in your records, you may want to simply call it miscellaneous income or other income.

If your rewards points take care of 10% of your bill and you don’t account for it somewhere, it will look like you increased your gross margin by 10%. That’s why you should account for everything and keep your expenses what they are.

Rebates

Rebates that you offer to customers can also be tricky because money is taken off of a regularly priced service or product. The best way to account for a rebate is to input the full amount of the product or service as credit, enter the rebate as debit, and then record the invoice, cash, or check as debit once the customer pays.

Assets and fixed assets

When you buy things like furniture or a computer, it should be labeled as an asset. If you can walk away from a business, take it with you, and sell that item to someone else, it is a fixed asset.

Business expenses

For a business expense, it must be ordinary and necessary, according to the IRS. If you buy a new suit for a work function, that’s a personal expense because you can wear the suit to things outside of work. If you have to buy a uniform that is specifically tailored to you and specifically for the purposes of your job, like a firefighter’s uniform, then it can be a business expense. If you get a shirt embroidered with a company logo, you can deduct the embroidery as a business expense only.

These are just a few of the things that may not easily fit in a box when you’re tracking finances, but there are certainly other unique situations that can occur. If you need help with determining the best way to track things for your business, give us a call.

Are your financials in good order?

Good griefwe're already halfway through the year!

By now, there is adequate data from your business to indicate whether or not you are on track to hit your milestones and goals for the year. You probably have a “gut feel” about things, and the raw data is there, but do you have the financial reports in good form so that you could prove your gut feel to yourself? Or anyone else for that matter?

Reports that justify how you think your business is doing are important for two reasons.

The first, and best, reason for good financial statements is so that you very well understand your own business. I can remember the first time I ran an eye down the accounts and saw total spending for a certain category. “I spent that much on that?!” I really had no idea. It was a normal part of running my business, but seeing the number made me realize the need to rethink the process behind the expense.

Here's the next best reason. Good financial statements are critical to justify your financial accuracy and stability to an outside party. That may be for a bank loan, potential investors, or an auditor.

Relying on bank statements to run your company can lead you astray, sometimes to a disastrous degree. Thinking the bank balance is what you can spend is usually false, because it does not take into consideration what checks are outstanding, and you may spend more than what is actually available.

Or let's say you receive a loan from a friend or family member and deposit the money. Relying solely on bank statements, and without your proper documentation and financial accounting of the loan, the IRS can decide it should be counted as income and should be taxable! You'd then have to produce the loan documents (that would, hopefully, have been drawn up at the time of the loan and not as a result of this problem) to prove the deposited money was not income, and therefore not taxable. The sheer amount of time it would take to communicate and convince an auditor, not to mention the stress of the situation, would have been saved many times over had the loan been recorded correctly at the time. And as one who has seen numerous audits of many kinds, I can tell you that once an error is found, the auditor will dig deeper and harder looking for more, because there usually are.

Similarly, bankers know that bank statements do not tell the whole story, so they would require additional information to even consider making a loan. The income statement would tell them what your revenues and expenses are, and the balance sheet would show assets the company has, as well as what other liabilities you may already owe.

If you're not sure you could come up with financial statements, it could be time to talk with an experienced bookkeeper to help you produce them, or to advise you in setting up a process for you to follow yourself.

Accounting for trade-outs, aka barter

You've heard the saying, "Cash is king!", and no one knows this better than startup and small business owners. Few have money lying around just waiting to be spent on advertising, bookkeeping help, or other services that would free up their time, and allow the actual business to get done. What to do, what to do??

As business owners network and meet other owners in similar positions, the idea of trading out services, aka bartering, almost inevitably comes up. It is certainly a viable option, and I do it myself, but with the following caveat: I always, always get an upfront agreement that we will invoice and pay each other for every job, or monthly billing. Doing so keeps the business transactions at arms' length - the way all business transactions should be - and is essential to accurately determining the financial health of the business, not to mention that it's required by the IRS.

Not accounting for trade-outs/barter is the same as not accounting for revenues and expenses: a sloppy no-no.

There's no magic to recording such transactions. When you receive your trade-out partner's invoice, you record the appropriate expense, and set up a payable. When you send out an invoice, you record the appropriate income, and set up a receivable. IRS guidelines dictate that the value of barter transactions must be a fair market value. In most cases that amount is already known - it's what you and the other party usually charge for such services or goods.

It is possible to accurately record barter without exchanging invoices and checks, but I've found that many of my clients do well to just take care of the basics: receive bills, pay bills, send invoices, deposit payments. Handling barter the same way as all other income and expenses keeps things routine, and they are not overwhelmed with journal entries or "Barter" bank accounts, etc. Let's keep this simple, Sam.

One of the best arguments for this handling of barter transactions is that you have accurate financial statements; your income and your expenses are accurately reflected. Should the time come when you want to switch vendors or service providers, you know exactly what you've been paying, and you'll know what kind of hit your income is going to take.

Another best argument is being in compliance with IRS guidelines. You need to keep a paper trail for all barter transactions and exchanges. For more information, see the IRS document Bartering Produces Taxable Income and Reporting Requirements.

Three financial needs of your startup

For all the excitement that comes with starting a business, there are dull details. You may not want to spend time on them, but the nitty-gritty financial aspects can greatly affect your business, and they’re certainly vital for growing your business.

Addressing these three key items will help you ensure your company is ready to grow, and is less likely to run into speed bumps along the way.

1. Regulatory identification

There are agencies for which you will need identification numbers. The best place to start is with a federal tax ID number, and you’ll need it for several reasons:

  • establish a bank account in the name of the business;
  • register with your Secretary of State;
  • file and pay employee withholding, and payroll taxes; and
  • file income tax, depending on your company’s structure.

There is usually a different number required by state agencies for unemployment taxes, and for state income tax withholding, if applicable.

2. Chart of Accounts

A chart of accounts (CoA) organizes your assets, liabilities, equity, revenues, and expenses. It allows you, and potential lenders and investors, to understand the money moving in and out of your business. And having a good chart of accounts allows you to plan for growth.

I recommend to my startup or relatively new clients that they spend time considering what revenue categories they want to track, as they will influence how best to set up the CoA.

Let’s say you sell, maintain, and service computer hardware and software. Those are broad categories, and may seem adequate to begin with, but I’m willing to bet that before six months is up, you’ll wonder if the revenues are from servers, desktop PCs, laptops, or accessories such as monitors, keyboards, battery backups...well, you get the idea.

If you’ve dumped all the revenue in one account, you’d have to go back and break out that info from other reports; a time-consuming task. But if you have a primary revenue account of Hardware, then sub-accounts labeled Servers, Desktop PCs, Laptops, and Accessories, you would already have that info. You might even want to have further sub-accounts under Accessories labeled Monitors, Keyboard/Mouse, UPS, and so forth. But don’t get carried away!

And you won’t want to overlook the labor revenues of installing, maintaining, and servicing that equipment. It’s a good idea to break those out, too. If you find you spend a lot of time servicing your equipment, there may be a business opportunity to sell preventive maintenance agreements, and that margin may be better than emergency servicing.

Expense categories need similar consideration. If you dump all insurance expenses in one account, and you see an upward trend in that account balance over time, how will you know, without digging back through your files, if it’s because general liability rates or workers comp rates have gone up?

Finally, you can speculate what might happen when you need to grow. How will your chart of accounts change when you have more expenses? How will your financial situation change when you add a new revenue stream?

3. Fixed assets

Fixed assets are your company’s tangible long-term assets. We’re talking about land, buildings, equipment, and furniture. If you account for fixed assets now, you’ll have a mechanism in place for when your business grows and acquires more fixed assets, or divests of them.

Another reason to record your fixed assets is that another business may value them when they consider purchasing your businesses. Many startups today have an exit plan, a plan to sell their business once it grows to a certain degree. Buyers will value your fixed assets because they may want to use those assets for themselves.

Want somebody to help you with the more boring parts of growing a business?

We help business of all sizes navigate any potential financial roadblocks so that their owners can focus on the more fun parts of building a business. If you’d like bookkeeping assistance, let’s talk.