Below are ways to organize and process transactions on your small proprietary business to help during the process of filing your business' taxes and if an IRS audit is conducted. For a more detailed approach, including processing transactions on a medium-sized entity, and ways you can reduce errors, fraud, or illegal acts to your business, see my sections on Internal Control and Fraud. Please contact me for more information on these topics.

 

• Obtain a separate EIN tax number. Never use your personal social security number. I can obtain this tax EIN number.

• It may be necessary to set up your small business as an LLC (Limited Liability Company) or Incorporate. You will want to protect your personal property and assets. This is very inexpensive and I can help with the formation.

• Annually, purchase an inexpensive folder, filing cabinet, or box that provides sections for each month of that year.

• When goods are purchased or invoices are paid, place the receipts in these sections, separated by month.

• Obtain a separate business bank account. Don't combine your business transactions with your personal bank account.

• Never, ever, run PERSONAL expenses through your business account. Keep it simple for everyone!

• For your entity's tax year, add up the total dollar amount the bank said was processed during the entire year by deposits and disbursements. Then further breakdown the total sum of the year's bank deposits into categories: Sales, personal capital contributions, interest, refunds/exchanges, etc. Then breakdown the expenses into categories: utilities, personal withdrawals, rent, auto, etc. Please make sure the totals for the year, per bank, add up to your breakdown of the two categories. Then, disclose to your accountant business transactions that did not go through the business' bank account: items paid with cash, charge to personal credit card, etc.

• If taking personal distributions from your business' profits or income, write a check made out to you and deposit it in your personal bank account.  Write "personal" in the memo line for these or other items that are non-business related.

• Always have the check images printed along with the mailed bank statement. There may be a small fee. Pay the fee or change to a bank that doesn't charge the fee! Your check images may be required by the IRS. Having the bank go back a few years and print them can be time consuming and costly to your business. Always have a printed bank statement mailed to you. The preparer will need to review the bank statement images to process your transactions efficiently in most cases.

• Deposit all income, including cash, in the business' bank account. This keeps it simple for the preparer. He/she just adds up the total deposits by the monthly statements. If start-up personal deposits are made to start the business or to keep it going, make a separate deposit and make sure you bring this personal deposit to the attention of your preparer. You do not want to include a personal deposit in income and pay taxes on it!

• When writing checks make sure you utilize the entire memo line. Write a brief description on what the check was for (rent, office supplies, equipment-printer, etc.). Don't make your preparer guess, have to contact you, or have to go through the receipts if necessary. This can cost you more money on preparation fees. Be as detailed as possible on the memo line! 

• Try hard not to use actual Cash on any transaction. Keeping up with cash receipts is very difficult and extremely time consuming. Use a Debit Card instead. This confirms the business transaction goes through the bank and  its recorded. Moreover, you have a double proof of purchase: the bank transaction and the actual receipt. My opinion, the IRS hates cash transactions. Use the card even if the amounts are extremely small. Meals paid with cash take lots of time to add.

• When at a store and personal items and business items need to be purchased, make them two separate transactions. Personal items should go through your personal accounts and the business' items should go through the business' account. Having personal and business items on the same receipts complicates things tremendously. Sales taxes are calculated differently on items. Separating these two transactions simplifies the sales tax implications.

• Always make a list for the preparer on equipment purchased during the year. Equipment has different tax implications and is reported differently than general supplies.

• Try and have a separate credit card for your business with only business transactions charged on the card. If interest is charged, there will be no need to allocate personal or business portions of interest for correct tax deductions.

• Consult your tax preparer on how travel, including automobile, expenses are deducted. IRS mileage rates may be more easier and beneficial for your business than actual gas ticket receipts. Detailed mileage logs will also need to be kept!

• If you pay contract labor you may have to file additional forms with the IRS if one person makes over $600 for that year.

• Consult your tax preparer on whether the person who helps your business is a contract employee or an actual employee. Actual employees will need to have tax forms filed and withholdings on their earnings. This is currently a huge IRS concern!

• If cash has to be involved on a transaction without a formal receipt, document the services or goods on a memo, having the person sign the memo on the work they performed, along with their address. These can include mowing and simple jobs.

• Last, remember that ALL, if not most of the business income and expenses should go through the business' bank account. This way every transaction is captured during the year and not easily missed by the preparer.