So why do we need to keep good bookkeeping records? As a small business owner you know what a headache it can be to keep up on the books and to understand what you’re doing and do it correctly. So why bother? Well, the obvious answer is so we know if we’re making money or not. Which is correct, but it’s really only half the reason. The other half is so that we can accurately prepare our taxes and minimize our tax burden. Hmmm, that gets a little more complicated doesn’t it?
How do we know if we’re reporting our taxes correctly and keeping track of everything that we’re expected to by the government? Well, quite frankly, I don’t think most small business owners worry too much about the details of it all. Once they’ve given what they have to their tax preparer, they trust everything is done correctly. Which, luckily, for the most part is true. However, there are a couple of specifics that concern me with this habit.
Number one, is the accuracy of the information given to the tax preparer. As we all know, garbage in garbage out. I have faith your tax person is completing your tax return correctly, but they are doing so using the information that you provide to them. So, unless they also do your bookkeeping, they are depending on you to be sure all the information is correct.
Number two, is the recordkeeping. Are you keeping everything required by law? Do you even know what records are required by law?
Before you tune out and stop reading, let me ask, why does all this even matter? The truth is that as a small business owner you are gambling every day. You need to choose: be honest and keep really clean books and all required documentation, or don’t. And the fact is, there is only one time when it will make any difference at all. IF YOU GET AUDITED!
Yikes! Do you want to gamble with that chance? I know a lot of small business owners who slide well into the grey area between doing what they are supposed to do and doing what they want to do, or not do. So to get back to the question I asked earlier, why does all this matter? Because, even though the odds are slim, you can end up paying a lot if you take a gamble and lose. An audit is not usually a pleasant experience. I recently assisted some clients through an IRS audit which prompted me to write this article. With their permission, I’m retelling some of what we all learned from their experience. It doesn’t pay to gamble, and it’s important to keep your books clean and to keep required documentation. I also learned, that I should not assume that just because a client has a tax preparer that they know what they need to be doing.
Lesson learned, and shared:
- Be sure you are recording your business expenses separately from your personal expenses
- Do NOT try to sneak personal expenses onto your business, if they are not legitimate business expenses, they should NOT be paid by the business
- If you are not trained in proper bookkeeping, hire someone qualified to do it for you
- Keep your backup documentation and keep it organized and accessible
- Track your business mileage vs your personal mileage as well as your total miles
- If you are not sure whether or not something is a legitimate business expense or which records you should be keeping, contact your tax preparer and ask him/her
And, if you do end up getting audited, don’t panic, just follow the instructions you receive and be honest. It’s rare to come through an audit unscathed, but you will survive and the better prepared you are for one, the less stressful and expensive it will end up being.
Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (https://strongwomenthriving.com/), a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a new book that both shares her personal story and addresses financial abuse. She can be reached at firstname.lastname@example.org.