Paying Taxes on the Wrong Numbers
Did you know your tax advisor may not go through all of your transactions for the year to ensure accuracy? Traditionally, the tax accountant looks over your numbers for reasonableness and asks some questions, but they don’t generally dive into your books to find mistakes or errors (or they will charge extra to do this). We’ve even had a client whose tax advisor gave them a credit on their taxes since their QuickBooks was in such great shape!
As part of our services, we offer a clean-up of accounting records. While many of our clients know there are some issues, several of them have no idea there are significant issues with their records.
Whether you do your own bookkeeping or hire someone to do it for you, you want to make sure the figures you give to your tax advisor are correct. Here are few of the areas you want to check out.
BANK ACCOUNTS & CREDIT CARDS
Hooray! You’ve reconciled all of your accounts! They have to be correct now, right?! The answer is... maybe.
Does the balance in your checkbook or in your accounting software match fairly closely to what the bank says? While there may be a few checks outstanding or an end-of-the-month deposit timing difference, the numbers should be close and understandable.
Look at your reconciliation...what is still outstanding? There are often duplicate expenses/income recorded or transfers between accounts are recorded incorrectly. If you added a new bank account in your accounting software, the software may have added a beginning balance that you also detailed and recorded. All of this leads to incorrect income and expenses as well as balance sheet errors.
Do you have an external system to record sales such as a Shopify, Etsy, Vagaro , etc.? Have you tied your sales from these systems to your books? We often find that only the amounts deposited are recorded on the books. The amount deposited may be net of expenses, or there may be a balance retained by the system. For example, Amazon holds an amount in escrow to cover potential returns. Total sales need to be recorded separately from the expenses. If clients reimburse you for expenses you paid on their behalf, you must show this as income and then add the corresponding expense.
While we cannot stress enough the importance of keeping your business and personal funds separate, even the best of us occasionally use the wrong credit card or bank account to pay for something personal. This should never be recorded as an expense. It is a draw, distribution or dividend depending on your business structure. Intentionally deducting personal expenses on your taxes is fraudulent and can bring heavy fines if audited. Keep your money separate!
OTHER RECEIVABLES & PAYABLES
Do people owe you money? Is the correct amount receivable on your books? You could be over- or understating your income if it doesn’t.
Do you have loans? You should receive a statement each year from the financial institution you have the loan with. Make sure at year end the amount you’re showing as payable matches the amount in your records. Often, when you add a loan in your software, it makes some assumption entries that can make your figures inaccurate. Failure to do this can cause you to either miss out on interest deductions or overstate those deductions. If it’s a personal loan, verify the amount for correctness and to avoid any misunderstanding down the road from the person you have borrowed money from.
For 2020, accounting for the grants and PPP loans can also be tricky. If you do your own record keeping, make sure your tax advisor is aware of these so they can make sure they are handled properly for tax purposes.
We all want to pay as little tax as possible and avoid an audit. Ensuring your records are correct before doing your taxes is the best way to be sure your taxes are accurate. Need help with your cleanup? Give us a call!