Balanced books are critical to the success of any business, even yours. But bookkeeping itself is one of those time-consuming tasks where errors are easy to make and expensive to rectify down the line.
Take a few minutes now to check that you’re avoiding these common bookkeeping mistakes. With a little effort, you can reduce the time you spend on your books, and increase your chances of getting a better deduction on your tax return.
Mixing Business and Personal Finances
Even though it’s tempting to manage your business and personal finances from a single account, doing so leaves you open to financial and legal risk in the event that your business is on the hook for a sum of money. Commingling your expenses can also lead to unnecessary headaches come tax time, because you’ll need to go through your monthly statements and manually identify your business transactions.
In short: your books, your tax returns, and your personal sanity will all be so much better off once your personal and business finances are separated. If your finances are currently commingled, learn how to separate your finances, and read our step-by-step guide to setting up a business bank account to get started.
Throwing Away Receipts for Purchases Under $75
The IRS requires you to keep receipts for business expenses over $75 for three years from the date your return was filed or the date it was due (whichever is later). But keeping receipts for all business purchases makes bookkeeping much easier. It also means you have physical proof to back up any business purchase in the event of an audit.
Thankfully you don’t need to stuff receipts into a shoebox or a filing cabinet anymore. Use a service like Dropbox to organize and store your receipts online, so you can access them any time you like from the cloud. If you have an unusually large amount of receipts to file online, use Evernote’s ScanSnap Scanner or Shoeboxed’s Magic Envelope to expedite the process.
Not Bothering to Track Mileage
If you drive a lot for business, mileage costs can add up to a hefty tax deduction at the end of the year. It’s too easy to forget or simply not bother to track the mileage on a trip here or there, so streamline the process with an app like MileIQ. If you’re unclear on the types of mileage you can and can’t deduct, check out these guidelines for the mileage deduction.
Misclassifying Employees and Contractors
Properly classifying workers is crucial, because it determines the taxes that need to be paid, when they are paid, and who pays them. Misclassifying workers is an audit red flag, as businesses have been caught purposefully miscategorizing employees in an attempt to avoid paying taxes. If you work with independent contractors, use this guide to double check that they really are contractors and not employees, and adjust the classification if necessary.
Doing It All Yourself
Unless you’re thrilled by monthly bookkeeping and filing taxes, your time is probably better spent on growing your business. As your business expands, your bookkeeping and accounting needs become more complex, so it’s better to have an accountant and bookkeeper work with you right from the earlier stages of operation.
A good bookkeeper and accountant will innately understand your business’s needs, take care of the financials while you’re busy growing the business, and help you identify opportunities to maximize revenue as your business expands.
Not Reconciling Every Month
Reconciliation is the process of cross-checking the transactions listed in your books with a bank statement. It ensures that the money leaving your bank account matches with the money being spent on your business. This is where having someone handle your books comes in handy as they’ll reconcile your books and produce financial statements on your behalf.
If you intend to do your own bookkeeping, make sure you reconcile each month. The resulting financial statements you’ll create are critical in providing an overview of the financial health of your business, and having up-to-date, reconciled books will save you from a huge headache when it’s time to file your taxes.
At Bench, we specialize in handling bookkeeping for small business owners. If you have any questions about bookkeeping, tweet them to us or post a comment below. We’d love to help you out. Click here to get a free month of bookkeeping and try Bench risk-free.
Disclaimer: This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.