Nothing keeps you busier than running your own business — especially when you are just getting started. When your days get crazy, it’s easy to set small bookkeeping tasks aside “for later,” or overlook accounting best practices.
This is a huge mistake.
Little omissions can cost you big time at tax time. Take a moment now to review the following common expense mistakes many small business owners make. Doing so could save you money on your taxes or even help you avoid an audit.
Not saving all receipts. Though the IRS doesn’t require receipts for purchases under $75. However, they do require adequate records, including the amount, date, place and business reason for the expense. If you do forget a hard copy, take a look at your credit card expenses online. It should give you a time, place and amount stamp. Make it a daily or weekly habit to gather receipts whether online or physical copy and compile them into a central location.
1.) Not Tracking Reimbursable Expenses. It happens to the best of us. You’re out shopping with your family, and you see an item you really need for your business. However, when you go to pay for it, you realize you’ve left your business credit card on your desk at home. Rather than take the time to make an extra trip later, you pay for the item with cash or put it on your personal card.
Best practice, of course, is to never mix business and personal expenses. However, if you do, be vigilant about tracking the expense. Save the receipt as documentation of your purchase. When you enter it into your books, be sure to include a memo explaining the situation and how the item will be used in your business.
2.) Not Reporting Barter Transactions. Barter can be an excellent way for a startup business owner to acquire needed items affordably. However, if you trade goods and services on behalf of your business, the IRS considers it a taxable transaction. Failure to declare barter transactions and their associated taxes could result in an audit and/or significant penalties.
When you report barter transactions, value your goods or services just as you would for a regular sale. If you use one of the popular bookkeeping software options available on the market, you can create a barter account for tracking purposes. Consult with your accountant if you need help.
3.) Not Staying Up to Date on Payroll and Sales-Tax Remittances. From time to time, nearly every small business runs into cash flow problems. This is especially true of startups and seasonal businesses. When this happens, you may be forced to “rob Peter to pay Paul” — temporarily borrowing money designated for one purpose to cover short-term expenses in another area.
Whatever you do, DO NOT even consider using your sales and payroll tax monies to solve cash flow problems. Penalties and interest for late filing are severe and can cascade rapidly into crushing amounts. Plus, the amount of time you will spend on the phone with the IRS or your state department of revenue will eat away at your productivity like nothing else.
Solve your cash flow problems in other ways, and deposit sales and payroll tax funds into a separate account. Be sure to set reminders to yourself to file these taxes on time and in full.
4.) Not Separating Equipment and Supplies. Not all expenses are equal. For tax purposes, you need to be aware of the difference between equipment and supplies.
Supplies are materials you use and consume in your business, such as paper, automobile tires or batteries. These are simple expenses.
Equipment with a useful life of more than one year — such as computers, vehicles and furniture — are considered capital expenditures. Unlike supplies, they are subject to depreciation. This is an annual allowance to cover deterioration or obsolescence of the item over time. Depreciation can help you recover some of the cost of the item, but improperly lumping your equipment in with your supplies can lose you these cost-recovery benefits.
Depreciation can get complicated. For instance, under certain circumstances some capital expenditures may be considered current operating expenses. Therefore it’s a good idea to discuss your situation with a tax professional before filing.
Always remember that incomplete or confusing data is a huge red flag to the IRS. The time and expense of an audit far outweighs any minor time savings you might realize by cutting corners on your bookkeeping. Avoiding the expense mistakes listed above can help you steer clear of audits and take advantage of deduction opportunities that could reduce your taxes significantly.
This guest post is from Chris Allen. He serves as the CEO of Bepoz America, a point-of-sale software company. Together Chris and Bepoz gurus, specialize in customizing small to medium business’s POS systems to get a handle on expense mistakes and other unique business demands.