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Small Business Record Keeping

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  1. Small Business Record Keeping Record Keeping and Accounting Made Easy

  2. Hello – Ron Cornish • Background • Education • Career • Indian Country • SGU, TBIC, CCC, NAU, CAIED, ED, RE, EE, NDN

  3. Today’s Agenda • How to keep track of your business transactions. • Business requirements of the IRS • Filing of source documents • Computer or manual bookkeeping? • Financial Statements you may need

  4. BENEFITS OF KEEPING RECORDS • Monitor the progress of you business • Prepare Financial Statements • Keep track of deductible expenses • Prepare your tax returns • Win IRS audits

  5. SIMPLE BOOKKEEPING • The IRS does NOT require you to keep any special kinds of records. • You must clearly show your income and expenses.

  6. Simple items for business record keeping • A business checking account • Income and expense journals • Files for supporting documents • An asset log

  7. IF YOU HIRE EMPLOYEES These records must be kept: Payroll tax records Withholding records Employment tax returns

  8. BUSINESS CHECKBOOK • One of the 1st things you do when setting up a business. • It’s the simplest record of your income and purchases • Business finances must NOT to be mixed with personal accounts

  9. BENEFITS OF KEEPING A SEPARATE CHECKING ACCOUNT • Much easier to keep track of business income and expenses. • It will be useful when the IRS audits you • Validates claim of being a business rather than a hobby. • Helps establish status as an independent contractor vs being an employee.

  10. SETTING UP YOUR BANK ACCOUNT • For depositing self-employment compensation and for paying expenses RELATED TO THE BUSINESS • If a sole proprietorship, just open a separate personal checking account.

  11. PAYING YOURSELF • Write a business check to yourself, then deposit it into your personal account. • Known as a withdrawal or “personal draw”, it is for paying non-business and/or personal expenses.

  12. WHEN YOU WRITE CHECKS • Keep excellent check records NOW! • Write extra notations when and where needed – for clarity later on.

  13. DON’T WRITE CHECKS FOR CASH • It doesn’t clarify who and/or what the check was written for – that would make the IRS very interested. • If you must, staple the receipt directly to the check to help identify the purchase.

  14. MAKING DEPOSITS • Enter into your journal: • Date and amount of deposit, • A description of the source of the funds – for example, a client’s name.

  15. INCOME & EXPENSE RECORDS • Expense Journal • Income Journal • Automobile mileage and expense records

  16. Expense Journal • It shows what you buy for your business • Always include a category called “Misc.” • Keep AUTO bills separate, as a different set of rules apply for autos

  17. Income Journal • Shows how much money you’re earning • The source of each payment • Other categories that could be of great use

  18. Automobile Mileage and Expense Records • If you use a car or other vehicle for business purposes other than getting to and from work, you can deduct for the cost of gas and other expenses. • Depreciation can also be claimed for the vehicle. • Use a log book.

  19. Computer Software • Quicken • QuickBooks • Peachtree • MS Money • DOME on computer • Others

  20. Supporting Documents • The IRS knows very well you can claim anything in your books, since you create them yourself. • Thus the IRS requires you have documents to support your entries. • You DON’T have to file them with your return, just have them available if you’re audited.

  21. Income Documents • If audited, usually you have to furnish both business and personal bank statements. • If bank deposits exceed stated revenue, IRS can assume underreported income and assess additional tax, interest, and penalties.

  22. Income Documents • You must be able to prove sources of all your income. • Keep docs showing source and amounts earned. • Also keep: Bank deposit slips, invoices, and all the 1099-MISC forms clients give you. Keep bank statements as well.

  23. Expense Documents • In absence of supporting documents, IRS assumes personal expense item. • At 25% bracket, a $100 disallowance will cost $25 in federal taxes, plus penalties and interest – plus SST goes up $12 too. • Simple receipts, cancelled checks, etc. leave too much ambiguity, so combine docs into ironclad deduction.

  24. Entertainment, Meals, and Travel Expense Records • History of abuse -- so IRS is careful • Requires most records, and will be most scrutinized during an audit.

  25. Travel Expenses Deductions You Must Document: • The date the expense was incurred • The amount • The place • The business purpose for the expense • If entertainment and meals are involved, the business relationship of the people at the event.

  26. Filing Supporting Documents • Use a separate file folder for each category.

  27. ASSET RECORDSneeded to verify… • When and how you acquired the asset • The asset price • Cost of any improvements • Section 179 deduction taken • Deductions taken for depreciation • How you used the asset • When and how you disposed of the asset • Selling price • Expenses of the sale

  28. Listed Property --Requires a usage log book • Property that can easily be used for personal as well as business use. • Examples: Cars, boats, airplanes, and other vehicles • Computers • Cellular phones • Any other property generally used for entertainment, recreation, or amusement.

  29. How Long to Keep Records • Why? – Audits (No.1 reason) • Financing • Keep tax records indefinitely, supporting docs for 6 years after tax return. • Long term assets for three years the past depreciated life.

  30. If You Don’t Have Proper Tax Records • Cohen Rule (George M. Cohen)

  31. Accounting Methods and Tax Years • The simplest and most used methods and tax years used by small businesses and sole proprietors: • Cash method • Calendar tax year

  32. Methods of Accounting • Cash accounting • Accrual basis

  33. Tax Years • Tax year versus Fiscal year

  34. Questions & Answers

  35. Pack your bags, shuffle about, and let the instructor know you are now ready to call it quits for today. • Do what it takes to be successful, • Good luck to you all Ron Cornish (928) 774-0036