DOs and DON'Ts
Sole Proprietorship's Financial Record Keeping
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Your vision for your business success should include a smooth, efficient
process for handling all of the necessary financial record keeping and
tax reporting responsibilities of the business. Because "time is
money", you need procedures that will optimize your time by streamlining
your efforts. This paper is a stress-reducing guide, based on both the
positive and negative experiences of hundreds of sole proprietors and
their financial record keeping practices. It is designed to steer you
away from many common bookkeeping pitfalls and bureaucratic nightmares
(IRS, Tennessee Department of Revenue, etc), while pointing you towards
sanity and prosperity.
If you would like to:
Eliminate the overpayment of taxes due the incomplete reporting
of business expenses
Ensure that funds are budgeted and available to make IRS payments on
time
Eliminate penalties and interest expenses by meeting IRS reporting and
payment obligations in a timely manner
Reduce the time spent on financial record keeping
Then this guide is for you!
DOs
1. Set up a separate bank account for your business.
2. If you plan to use a credit card for regular business transactions,
open a separate credit card account for the business. Save all of your
business credit card statements. The transactions will reflect business
expenses and the finance charges are a business interest expense. If
however, you will rarely be using a credit card for business transactions,
then you can capture the transaction information by saving copies of
the credit card statements and highlighting the business purchases.
Next to the highlighted business transactions, pencil in a notation
that will clearly identify the business item. For example, "office
supplies", "laptop computer for business", "business
lunch with client (and name of client)", "inventory purchases",
etc. Save the credit card statements with this information and put them
in your business financial files. (The finance charges on a personal
credit card are not a business interest expense.)
3. Deposit all revenues checks and cash into the account promptly after
you receive them, so you will have an easy track record of your total
revenues. Your bank statements will provide that record for you.
4. Pay all expenses of the business out of this account and that will
provide an automatic record of your business expenses on the bank statements.
In addition, photocopies of checks that the bank sends along with the
monthly statements, will provide a more detailed explanation of your
expenses.
5. If you pay cash for some expenses, save the receipts in a file folder,
a plastic "sandwich" bag, or an envelope. This information
is important for tax reporting as well as tracking your profitability.
6. When you want to "pay yourself", withdraw money for your
personal use and deposit it into your personal checking account or use
it as cash. Label the checks you write for this as "owner's draw"
on the check memo line. That will help your bookkeeper, accountant,
or tax preparer to accurately track your owner's withdrawals, and help
keep your personal financial transactions separate from your business.
Also, set aside money in a separate account to cover your estimated
tax payments that are due quarterly. An accountant can advise you on
what amount you will need to put aside, when it is due, and how to pay
this. (You will use IRS Form 1040-ES for estimated tax payments.) As
a general rule, for every $100 taken out of the business as an "owner's
draw", you should probably set aside approximately $30 for estimated
tax payments.
7. IMPORTANT: If you purchase any equipment or business assets
that have a useful life of more than one year, and they are not inventory
items or supplies, and the cost is $500 or more (such as a computer
or a vehicle), these items should be depreciated on your tax return.
Save all documentation relating to these purchases. Be sure to tell
your bookkeeper, accountant, or tax preparer about these items.
8. If you will be using one or more vehicles for your business, it is
important to provide documentation for mileage or actual vehicle expenses
so you make take advantage of valuable tax deductions. In general, a
taxpayer can choose to use mileage at the current standard mileage rate
OR actual vehicle expenses, such as vehicle depreciation, gasoline,
auto maintenance and repair, insurance, etc., BUT NOT BOTH. Some times
mileage will provide a bigger tax deduction; other times the actual
expenses will. If you track both, your tax preparer can then calculate
which will give you the bigger deduction.
9. If you expect to have employees, you will need to apply for a "federal
employer identification number" (FEIN#) from the IRS. You can do
so easily on-line or by mail. You must have this tax reporting number
in order to send collected social security taxes, Medicare taxes, and
federal withholding taxes that you deduct from your employee's gross
pay, to the IRS. You will report these collected taxes on IRS Form 941,
which you will file quarterly. The withheld tax money you will send
in is due on the 15th day of the month that follows each quarter. For
example, Quarter #1 is January, February, and March. On April 15th,
the money for Quarter #1 would be due. The IRS Form 941 Report, however,
is not due until the end of the month the follows the quarter. So, Form
941 for Quarter #1 would not be due until April 30th. If you will be
collecting and sending in $2,500 or less each quarter for your Form
941 Report, then you can arrange to send the money in with the report
at the end of the month following the quarter. Please see the IRS Form
941 Instructions. If you have employees in your business, the FEIN #
will also be used when you send in your annual federal unemployment
tax, called FUTA, which is reported on IRS Form 940. This is due in
January of the year following the tax year for which you are reporting.
(Please see IRS Instructions for Form 940.) For paying state unemployment
tax, called SUTA, you will need to apply for a Tennessee State Department
of Labor account number on Form LB-0441.
10. Spend some time reviewing your monthly financial information to
keep aware of your profitability as well as your business financial
needs in the near future. You will make better business decisions if
you have an accurate picture of your business' financial situation.
Many business owner's identify and track the key profitability indicators
for their business (e. g. weekly sales, revenue per employee, hours
worked per week).
DON'Ts
1. Do not co-mingle your personal financial transactions with your
business's financial transactions by using one bank account and/or savings
account for both of them. Doing this will require more time and money
for yourself, your bookkeeper, your accountant, or your tax preparer
to separate all of the transactions for financial and/or tax reporting
purposes. It will create confusion in your record keeping.
2. Do not procrastinate about deciding how you will keep your business
financial records. Do it yourself? Find a bookkeeper? Engage an accountant?
Wait until it is time to file your taxes and let the tax preparer figure
it all out? NOT A GOOD IDEA! A new business owner often can meet with
a potential bookkeeper or accountant at no charge, to discuss the possibility
of having bookkeeping services provided, or to see what it would cost
for some basic start-up bookkeeping advice. For example, a business
owner who wants to purchase a laptop computer and bookkeeping software,
might need an accountant to set the system up and show him or her how
to use it. Or, for the computer-shy business person, there are the classic
Dome Bookkeeping monthly record books that can be found in most business
supply stores. Do not automatically assume that getting information
or basic bookkeeping advice will be expensive. It is generally far more
costly to procrastinate and then have to pay someone to untangle a bookkeeping
or tax return mess later on.
3. Do not ignore tax-reporting responsibilities until you "get
around to it." If your business is profitable, you need to be aware
of the tax responsibility to pay estimated taxes for federal withholding.
Failing to do so might result in a penalty. And, if you earn $400 or
more in net profit (revenues less expenses), then you will need to pay
self-employment taxes. These taxes are reported quarterly on IRS Form
1040-ES, starting with the first payment in mid-April, the second in
mid-June, the third in mid-September, and the fourth payment in mid-January
of the following year. Note: two payments are due earlier: June and
September. The exact due dates change each calendar year and are published
in IRS instructions for Form 1040-ES. This information is available
on the IRS website on-line. (The approximate dates are two weeks into
the month when due.) Failure to make estimate tax payments in a timely
manner can result in a penalty. See IRS Form 1040-ES for instructions
or consult an accountant.
4. Do not neglect to create an accurate record of revenues received
by cashing revenue checks and depositing only some of the money, while
not recording the total amount of the revenue received anywhere. If
you don't like writing information down, you can always photocopy revenue
checks and let your bookkeeper, accountant, or tax preparer do the totaling.
Relying on your memory is not a reliable way to conduct business.
5. Do not pay the expenses of the business from many different sources
while not keeping a good record of all the transactions. For example,
if you use your personal checking account for some business expenses
and forget to save the receipts or record these transactions ….If you
have three different credit cards that you use once in a while for business
expenses, when you forget your checkbook, and then you do not remember
to record those expenses…. If your friend uses her credit card when
you shop with her for business supplies, and you need to reimburse her
later but do not record this….If your relative pays for some items that
on he picks up for you on his way over to visit, and your reimburse
him and lose the receipt, etc.
6. Do not write checks to yourself for personal use money (owner's withdrawals)
and then forget to make notations on the checks or in the check register
about this. Your bookkeeper, accountant, or tax preparer will then be
spending more time and your money to figure out what was going on in
these transactions. For example, could the purpose of this transaction
have been to get cash to pay for day labor or to send a worker for a
supplies purchase in an emergency, etc.?
7. Do not write checks from your business account and then neglect to
make entries in the check register that explains them. You need to record
the vendor's name and expense category in your check register along
with the date of the check. At tax time you might lose valuable deductions
if you lack proper documentation. Do not rely on the psychic abilities
of your bookkeeper or accountant.
8. Do not pay your personal home expenses such as utilities, homeowner's
insurance, maintenance and repair, etc. out of your business checking
account. If you have an office in your home that is solely devoted to
your business, you may be able to deduct a portion of the home up keeping
expenses as a business expense (Form 8829 for Schedule C on the 1040
tax return). However, not all of this is a deductible business expense.
Instead, pay your personal home expenses from your personal checking
account. Save your monthly utilities statements and payment receipts,
for example, for these expenses and bring them your tax preparer who
will evaluate possible tax deductions for you.
9. Do not ignore letters and/or notices from the IRS, the Tennessee
Department of Labor, the Tennessee Department of Revenue, the County
Clerk or Tax Assessor or other government authority that are addressed
to your business. If you need assistance in understanding bureaucratic
letters or documents which sound confusing, a simple phone call to the
appropriate agency or authority can often shed light on the situation
and avoid possible trouble. Your bookkeeper, accountant, or tax preparer
probably knows how to interpret the notice, letter or document. Why
not ask?
10. Do not neglect to calculate your business' profitability on a regular
basis. Are your revenues exceeding your total expenses? Having cash
"currently in the bank" does not necessarily mean the business
is profitable. Are the bills being paid or piling up? What are the financial
trends in your business?
Source: Jeanne Daly, SCORE Counselor
The material in this publication is based on work supported
by the U.S. Small Business Administration under cooperative agreement
SBAHG-04-S-0001. Any opinions, findings and conclusions or recommendations
expressed in this publication are those of the author and do not necessarily
reflect the views of the U.S. Small Business Administration. The information
contained in this publication is believed to be accurate and authoritative
but is not intended to be relied on as legal, accounting, tax or other
professional advice. You should consult with a qualified professional
advisor to discuss issues unique to your business.
File: Fin001_0612
Copyright 1990. SBA retains an irrevocable, worldwide, nonexclusive,
royalty-free, unlimited license to use this copyrighted material.
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