Common Mistakes in Small Business Tax Preparation

Tax planning and preparation are major challenges for small business owners. While you might be an expert in your area of business, that doesn’t mean that you are also an expert in the intricacies of Internal Revenue Service (IRS) rules and tax laws. The U.S. Tax Code is highly complex, and there are many ways that small businesses can encounter problems with their taxes. Here are some of the most common mistakes made by small businesses and encountered by TMD Accounting that you should avoid.

1. Choosing the Wrong Business Entity Structure

There are several different types of legal entity structures that you can choose for your business. Each of these structures has advantages and disadvantages. When you choose the wrong one, your business structure can expose your company to potential liability and result in higher taxes. The following types of structures are the most common:

  • Sole proprietorship
  • Limited liability company (LLC)
  • S-corporation
  • C-corporation
  • Partnership
  • Limited liability partnership (LLP)
  • Nonprofit

Some businesses choose the wrong tax entity while others fail to choose a structure at all. Either of these errors can greatly impact the future of your business. For example, while a sole proprietorship is the simplest structure for a business to form, it doesn’t provide any personal liability protection. Choosing a C-corporation structure for your company comes with many reporting and documentation requirements and can double the taxes you might owe. When you prepare to open your business, getting small business accounting services from TMD Accounting can help you select the most advantageous structure for your company.

2. Failing to File Taxes Or Send Proper Payments

When you need to file different types of taxes and send payments to the IRS will vary based on your business’s structure, your industry, and whether you have employees. There are many different forms that might be required, and you might also need to file different forms with the state as well.

Certain taxes must be filed every quarter, including payroll, estimated income, and sales taxes. Others must be filed annually, and you must also send your employees and contractors other forms directly so that they can file their tax returns.

Failing to file the right forms and submit payments on time can get your business in trouble. You might face high penalties from the IRS that could cripple your business. In certain cases, failing to file business tax returns or remit tax payments when they are owed could also expose your business to criminal liability.

3. Classifying Workers Improperly

Many businesses improperly classify their workers. For example, you might decide to classify your workers as independent contractors to try to save money on your tax bills. However, if you improperly classify workers, it could result in significant penalties. Make sure you understand the classification rules and follow them to avoid serious tax problems.

4. Underestimating Taxes or Underreporting Income

If you file your taxes as an S-corporation, partnership, or sole proprietorship, you will likely have to make quarterly estimated tax payments to the IRS. While you aren’t expected to guess how much your business will owe exactly, you are expected to be reasonably close. If you fail to make quarterly estimated tax payments or greatly underpay them, you could face a stiff penalty. If you understate the amount you owe by a substantial amount, the IRS might believe you were negligent and force you to pay a 20% penalty. If the IRS believes you tried to intentionally defraud the government, you could face a fine of up to 75% of the amount owed as well as criminal charges.

5. Commingling of Personal and Business Expenses

A major mistake that many small business owners make is mixing their personal and business funds and expenses. The IRS has strict rules against commingling personal and business funds. You can only deduct business expenses from your income and not personal expenses. To prevent you from deducting the wrong expenses, you must ensure your personal and business finances are kept separate. This means having a separate bank account for your business and only using a business credit card for business purchases and not your own. If you do use personal assets to operate your business, including your vehicle or a home office, you must keep detailed documentation to support your deductions.

6. Poor Organization and Record-Keeping

Failing to keep good records throughout the year can make tax time difficult. If you leave everything until the last minute, you’ll likely miss out on business deductions you would otherwise have been able to claim. Disorganized records and poor documentation can also result in higher small business accounting services fees when it’s time to prepare your business tax returns.

To prevent these problems, make sure you have a system to track your expenses and income on a continuing basis throughout the year. Each month, your cash flow, credit card statements, and bank account statements should be reconciled. You can use software to help manage your bookkeeping so that tax time will be smoother for both you and your accountant.

7. Taking Improper Deductions

The deductions you can claim for your business are those that are involved in the ordinary process of operating your company. You can review IRS Publication 535 to learn what is deductible. If you claim deductions for things that are improper, you could face an audit and potentially severe penalties. Even if you claim legitimate deductions, you could be penalized if they are out of sync with your business’s income or the deductions claimed by similar businesses in your industry.

If you report a loss for your business several years in a row, the IRS could decide that your venture is a hobby instead of a business. If that occurs, your ability to claim deductions could be disallowed completely.

Find an Accountant for My Small Business

The best way to avoid potential tax issues is to be honest and remain organized. Working with TMD Accounting can also help you avoid potential mistakes in preparing your taxes and claim all of the deductions to which your business should be entitled. To learn more, contact us today at 1-856-228-2205.

Cash Management Tips for Your Small Business

As a small business owner, you need to manage your cash flow. Any owner should understand how cash moves in and out of their business. Being aware of cash flow can help your daily operations. All companies need to have a plan that focuses on cash management. Here are a few tips to help with these tasks.

Prioritize Your Bills

When you receive an invoice, you may want to pay it right away. However, that is not always the best course of action. You should extend your payable for as long as possible so that you can spread out your payment. It is not a good idea to pay all bills at the same time. It could drain your business’s cash, which can strain your supplier and employee relationships, especially if you cannot pay on time.

Instead of paying immediately, you need to review your bills and sort them according to priority. By staggering payment days, you can take care of the most important bills first, such as payroll and rent. After that, focus on the bills that are less important and have more flexible payment dates. In some cases, you can get a discount for paying a bill before the due date. With that, you should prioritize those bills to help save some money.

Be careful with this tip. You always want to pay on time. Late payments can affect your credit and require you to pay late fees.

Select the Right Payment Cycle

When you need to pay your employees, schedule the payroll to match your revenue streams. Some businesses, like retail stores and restaurants, generate revenue on a daily basis. They can cover those costs for the weekly payroll. However, for companies with a slow revenue stream, it can be a challenge to meet payroll obligations. Some businesses will adjust their payroll cycle to a biweekly or monthly schedule. Make sure to follow all applicable state laws regarding wages. Some states may have requirements that businesses must follow for payroll frequency.

Negotiate Supplier Payments

In many cases, you can negotiate with a supplier regarding payments. If you have a great relationship with a supplier, they are more likely to work with you. Think about flexible payment options to manage your cash. Many suppliers will offer special payment terms, especially if you order regularly or in bulk. With a payment agreement with your supplier, you can get more time to settle those invoices.

Collect Receivables Quickly

When you need to manage your money, you should look at your cash flow. You can improve that flow by collecting receivables on a timely basis. There are a few ways to expedite the process of collecting receivables. First, request a deposit from customers when taking an order or project. You could also offer discounts for customers who pay quickly. Also, you may want to move outdated inventory with discounted prices. Finally, use online invoices that offer more payment options for your customers.

Manage Your Credit Policies

When you offer any credit to your customers, you must establish a few credit policies to manage your cash. For example, you will want to take a look at your invoicing. It is crucial to quickly send out the invoices and follow up with customers for payments. Before you extend any credit, make sure to require a credit check for all new customers. Those customers who pay late can hurt your available cash. You will want to identify those late payers and develop a cash-on-delivery policy for those who don’t pay on time.

Use a Business Credit Card

Many people might not want to open a new credit card. However, a business credit card can free up your cash to pay everyday expenses. When choosing a business credit card, you should find one with a rewards program. In some cases, you can reduce your costs and get a percentage back on a few purchases.

Track All Expenses

You must keep track of all your business expenses. Make sure to check your monthly statements. If you need help with this task, small business accounting services can help you keep track of your expenses and cash flow.

Open a Line of Credit

If you want to maintain a balanced cash flow cycle, consider opening up a line of credit to get quick access to cash. Many businesses have a line of credit to bridge any gaps between their receivables and payables. Also, a line of credit can help cover unexpected expenses, buy equipment, and help with growth opportunities.

Use the Latest Technology To Accept Payments

When you want to accept receivables quickly, consider using online payment methods to collect those bills. Along with that, the latest technology can help you track the payments of every customer.

Manage Your Business’s Cash

When you can monitor your cash flow, it can help with your business’s short- and long-term success. By collecting payments quickly, monitoring expenses, and negotiating with suppliers, you will have a few options to manage the cash flow in your business. If you want someone to handle these vital responsibilities, make sure to find an accountant for your business.

Find an Accountant for My Small Business

TMD Accounting has been serving the Gloucester County community for over 40 years. Our accounting firm is a family-owned and -operated business. We are an affordable, reliable, and flexible way to help manage your company’s financial health. Schedule your consultation by calling 856-228-2205.

Your Small Business Tax Preparation Checklist

Small business owners should ideally prepare for tax filing season year-round. Planning can help to simplify the tax filing process and help small business owners to take advantage of potential deductions and credits for which they might qualify. As the tax season draws near, it is important to ensure you understand the various deadlines that apply and the documents you should gather. At TMD Accounting, part of our small business accounting services includes helping our clients prepare and file their business tax returns. Here’s a checklist that can help you get a jump on the upcoming tax season.

1. Know the Forms You Will File

The tax form your business will file depends on the legal entity structure you have chosen as follows:

  • Sole proprietorship – Schedule C with your individual Form 1040
  • Limited liability company (LLC) with one member- Schedule C filed with your individual Form 1040
  • LLC with more than one member – Form 1065
  • Partnership – Form 1065
  • S-corporation – Form 1120-S
  • C-corporation – Form 1120

Additional schedules and forms might also need to be attached based on the credits and deductions you claim and the types of income you need to report.

2. Information to Gather

Before it is time to file, you should gather the following information to make the process easier:

  • Employer identification number (EIN) or Social Security number
  • Business’s legal name
  • Business address
  • Business principal activity code from the chart in the instructions for
  • Schedule C
  • Income information from your business, including from sales, property sales, collected rent, dividends, interest, canceled debt, allowances, returns, and other income
  • Cost of goods sold for a deduction if your business sells products with a beginning and ending inventory by using the worksheet in IRS Publication 334, Chapter 6 to calculate it
  • Business expenses, including utilities, advertising, vehicle expenses, mileage, fees and commissions, contractor labor, depreciation, insurance, employee benefits, professional fees, legal fees, office expenses, employee wages, license, taxes, and others
  • Information broken down by location if you have locations in several states

Gathering this information can be simple if you use small business accounting software. If you haven’t kept good records, you might need to recreate them by using your bank statements, credit card statements, receipts, and other types of documentation.

3. Issue 1099s if Necessary

If you hired independent contractors or freelancers and paid them $600 or more during the tax year, you need to issue Form 1099-MISC to each one. This is a form used to report payments for work performed by non-employees and independent contractors. You aren’t required to issue a Form 1099-MISC if you paid a contractor through a third-party payment network such as PayPal. In that case, the payments will be reported by the payment processor on Form 1099-K. You can either print Form 1099-MISC through your accounting software or purchase blank forms from a local office supply store. Your accounting firm can also supply these forms for your business.

4. Know Your Other Small Business Tax Obligations

Small businesses also need to be aware of their other tax obligations and returns beyond the federal income tax, including the following:

  • Employment tax withholdings – Must be filed with the IRS along with quarterly payroll tax reports
  • Unemployment taxes – Paid by the employer without deduction from employees’ wages
  • Self-employment taxes – Covers the Medicare and Social Security taxes for self-employed people and must be paid quarterly together with estimated taxes
  • Excise taxes – Must be paid on certain types of activities or goods
  • Sales taxes – Might be required to collect and remit sales taxes to the state or local government
  • Property taxes – Local and state property taxes for your business property if you own it

5. Know the Filing Deadline

The filing deadline depends on the form you file. S-corporations, partnerships, and LLCs with more than one member that file Forms 1120-S or 1065 have a tax filing deadline of March 15. If this date falls on a weekend or holiday, your return must be filed by the next business day.

If you operate as a single-person LLC or a sole proprietor, you report your business income on Schedule C of your individual tax return. In that case, file Form 1040 and Schedule C by April 15. If it falls on a weekend or holiday, your return must be filed by the following business day.

6. Request an Extension if Necessary

If you can’t file your return on time, ask for an automatic extension. Single-member LLCs and sole proprietors can request an extension on Form 4868. Other business types use Form 7004 to request extensions.

An extension will give you an additional six months to file your return. However, if you owe money, your deadline for paying what you owe doesn’t change. Try to estimate what you owe and pay it by the original deadline so that you won’t be assessed penalties and interest.

Find an Accountant for My Small Business

While this tax preparation checklist can help you prepare for filing your taxes, working with an experienced accounting professional at TMD Accounting can make the tax process much more manageable. Contact us today to request a consultation at 1-856-228-2205.

How Tax Changes for 2022 Are Affecting Your Small Business

During the 2022 tax year, small businesses did not face major changes in tax laws. However, there are several things small business owners should understand when it is time to file their business tax returns for the year. One thing that is critical for small businesses is to ensure they always make their estimated tax payments on time each quarter and understand their tax liability. Here are some of the tax laws small businesses need to understand for the 2022 tax year and how they might affect their tax returns when it is time to file from TMD Accounting.

Small Business Tax Deduction

Partnerships, sole proprietorships, LLCs, and S-corporations are all pass-through entities that can benefit from the small business tax deduction. For the tax year 2022, the owners of small pass-through companies can claim a deduction of up to 20% on their portions of the income earned by their business up to $182,500 for single filers or $364,200 for joint filers. If the business’s qualified income exceeds the threshold, limitations will be applied. However, companies with significant capital expenditures and those that employ a lot of employees might still be able to benefit from the small business tax deduction.

Standard Tax Deduction

Small business owners that do not itemize their expenses can claim the standard deduction on their returns. in 2022, the standard deduction for individual filers is $12,950. Joint filers can claim a standard deduction of $25,900.

Estate Tax

Small business owners might benefit from the estate tax exemption, which is $12.06 million for individual filers and $24.12 million for those who file jointly in 2022. The increased estate tax exemption offers protection to a greater number of small business owners who have accumulated substantial assets and want to avoid potential tax issues when they pass away and leave their estates to their families.

Deduction for Expensing Equipment

Small business owners can immediately deduct the costs of purchasing business equipment up to a maximum deduction of $1.08 million in 2022. The spending cap for equipment purchases in 2022 is $2.7 million under Section 179. This tax relief is permanent.

Certain assets that depreciate over time might be eligible for bonus expensing in 2022. This involves expensing the entire purchase cost at once instead of only a fraction of the cost per year. The ability to benefit from bonus expensing will be phased out in 2024.

Tax Credit for Paid Family and Medical Leave

Under the Tax Cuts and Jobs Act, businesses that provide paid family and medical leave as a benefit for their employees can claim a tax credit. Under the Consolidated Appropriations Act of 2022, the credit was extended through 2025.

Deferred Social Security Taxes Due

In 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This law allowed employers to defer the employer portion of their Social Security taxes due between March 27, 2020, and Dec. 31, 2020. Businesses that benefited from these deferments had to pay one-half of the deferred amounts no later than Dec. 31, 2021. Those businesses also must pay the remaining one-half of the deferred amounts no later than Dec. 31, 2022. If you don’t pay the deferred amounts on time, your business will face assessed penalties on the total amount of the deferred taxes.

What to Do

As a small business owner, you likely have learned that tax preparation for small businesses is a year-round process. This makes it important for you to regularly meet with your accountant and bookkeeper and provide them with accurate financial records each month. Doing so allows your small business accounting services provider to develop a good tax strategy for your business and avoid potentially negative surprises.

Make Sure to Keep Your Tax Records for the Right Amount of Time

Make sure that you understand the tax return retention requirements in your state. While most states require businesses to keep their records for seven years, some businesses retain their records for longer periods in case they are audited. Talk to your accounting professional to learn about your tax retention requirements in the jurisdiction in which your business operates.

Have a Separate Account for Taxes

If your business is new and isn’t earning much revenue yet, you might not think you need to open a separate account for taxes. However, having a separate account for business taxes can help your tax filing process to be simpler and establish good tax habits that can protect your business’s future health.

On average, around 30% of your profits will go to taxes of some type. Open a separate account for your taxes. When you complete your account reconciliations and learn your profit amounts, move 30% of that amount to your tax account. Setting aside 30% of your monthly profits in a tax account can help your business avoid huge tax bills when it’s time to file your tax return.

Find an Accountant for My Small Business

Small businesses should keep in mind how tax laws affect them year-round. Planning for taxes can help to minimize how much you might have to pay. Working with an experienced accounting professional at TMD Accounting can help you develop a sound tax planning strategy to reduce your taxes and ensure you comply with all of the laws that apply to your business. To learn more, contact us today to schedule an appointment at 1-856-228-2205.

How to Prepare for a Small Business Audit

You open your mailbox to find a letter with a return address from the IRS. You open it to find that your small business is being audited and your heart sinks. No one wants to have their finances reviewed by the Internal Revenue Service, a prospect that is nerve-wracking, stressful and complicated. Small business accounting services say that getting a letter from the IRS does not have to mean fear and stress, however.

If you have prepared properly and documented your business expenses thoroughly, the fear of the audit may be more stressful than the audit itself. Use these tips to guide you through an IRS audit in order to make the process as painless as possible.

Understanding How Companies are Chosen for Audit

The first step in reducing the stress of an IRS audit is to understand what led to your business being chosen for one in the first place. Most small business owners have no idea why they were chosen and that is an indication that they likely have done nothing wrong. If the first things that comes to mind is “the accountant for my small business must have made a mistake,” you are likely correct. Most audits are due to minor errors that were picked up when tax returns are reviewed. There are some common red flags the IRS looks for when reviewing tax forms as well.

If you operate a business that is cash-intensive, like a café, the IRS may take a closer look. Deductions that seem excessive, such as for meals or entertainment as well as claiming 100 percent use of a company vehicle could trigger an audit.

Other triggers include:

  • Inflated salaries to employees who are also owners or stockholders
  • Reimbursed business expenses that are excessive
  • Paying or filing taxes late in multiple years
  • Very large charitable contributions

Even if those expenses are legitimate, they trigger a review by the IRS which is why small business accounting services suggest you change your operations, so these items are not part of your annual tax filing.

Keep Good Track of Your Finances

One question to ask yourself is “would the accountant for my small business be able to understand this expense?” If the answer to that is no, you may not be keeping good track of your finances. You should follow approved accounting practices throughout the year which will make it less likely your company will be audited. You need to review your financial accounts regularly in order to look for possible errors. Keep accurate records all year long, so you are not scrambling on December 31 to organize things for your small business accounting services. They are likely not going to be excited about a shoebox full of unsorted receipts. If your financial documents are organized and in order, even if you are audited, you will be able to provide details to the IRS.

Anticipate What Will Be Asked

An IRS auditor is likely not interested in seeing your entire financial picture. They are usually looking for particular information due to something that caught their eye in a review. Take the time to go over your financial details before the audit to see where they may have questions. If you had higher than normal meal and entertainment expenses one year because you were expanding your customer base, organize those receipts and any notes you may have about what you discussed during the meal. By cooperating and coming forward with a known problem area, the audit process can go much more quickly.

What Paperwork Do You Need?

There are standard documents the IRS will want to see, regardless of why the audit was triggered. They will want to see bank statements, receipts and canceled checks. The IRS will accept electronic versions, but they must include the name and address of who was paid, the date of the payment and the amount paid. If your company keeps formal books, such as ledgers and journals, you will need to turn them over to the IRS as well. Some businesses may be required to provide an appointment book, such as car service or hair salon owners. If one of the issues is higher than normal meals and entertainment, your appointment calendar may help prove the expenses were legitimate. Equipment and vehicle records may be requested along with travel and entertainment documents.

Small Business Accounting Service

The best way to reduce your risk of audit or to successfully prove that your tax returns were accurate is to work with an accounting service like TMD Accounting. One thing to ask is “does the accountant for my small business offer audit services?” If you have an accountant who files your taxes, they should offer audit protection and, if they make the mistake, many will cover any penalties and fees for you. Working with an accountant can not only help you manage the stress of an IRS audit, but they can also reduce the chance that a red flag will appear in an IRS review at all.

If you are in need of a small business accountant, contact TMD Accounting today to see how we can help. You can arrange for a no obligation consultation by calling 1-856-228-2205 or fill out the easy online form to see how our tax experts can help. Find out why our motto is “where numbers matter and people count. With 40 years of experience, you can trust that we will get your company’s financial world in order.

Understanding Your Small Business’s Financial Statements

Your business’s financial statements can be a key tool for managing your business. However, many businesses are confused by financial statements and don’t know what they mean or how they can be used. Here is some information from the professionals at TMD Accounting about your financial statements and how they can be used.

What Financial Statements Include

A financial statement tells you where your business money is, including its origin, how it was spent, and the current financial standing of your company. You can see this information by using the three primary types of financial statements, including your income statement, balance sheet, and cash flow statement.

These documents give you the following information:

  • The assets you currently have
  • Your business’s liabilities
  • The value of your ownership
  • Total sales/gross revenues
  • Losses and expenses
  • Net income
  • Cash flow, including the sources of money and how it has been used
  • Cash on hand at the start and end of a period

All of these types of information are crucial for your business so that you can make better decisions. Financial statements are an important component of running a financially stable and profitable business.

Why Financial Statements Are Important

Your financial statements will provide you with your business’s operational results, its current cash flow, and its current financial standing. They are important for all of the following reasons:

  • Documenting your business’s financial activities
  • Summarizing important accounting information about your business
  • Providing stakeholders with an accurate picture of your company’s financial situation

Lenders use financial statements to assess your level of risk when determining whether to extend credit to your business. They also include information that might be required under accounting standards and the law and contain the data that you need to complete your business tax returns.

What Is In Each Type of Statement?

You can analyze how your company is performing by using your financial statements.

The income statement will include information about your business’s total revenues, the cost of the goods or services sold, and other costs during a set period. It will then provide information about your company’s net income or a net loss.

Your balance sheet will provide data about your total assets, liabilities, and equity.

Your cash flow statement gives you information about your company’s financing, operations, inflows and outflows, and long-term debt.

How to Use Your Financial Statements

When you receive your financial statements, take a look at your income statement and treat it as a report card for your business. This might also be called a profit-and-loss statement and tells you how your business is doing over time. In the income statement, you can see the expenses your company has incurred and the revenue it has generated during the relevant period.

Income Statement

Your income statement can be used to gain an understanding of your business’s profitability and the steps that you can take to increase its profits. For example, you might see that you should cut back on some unnecessary expenses or focus on more profitable products or services. If you are searching for funding, investors will want to see your income statement to assess your degree of risk when deciding whether to give your company credit or venture capital.

However, your income statement won’t reveal the overall strength or weakness of your financial condition, show a list of your assets and liabilities, or show how money is flowing in ad out of your business.

Balance Sheet

Your balance sheet lets you see how strong or weak your business’s current financial condition is. Many investors typically begin by reviewing a business’s balance sheet to get an understanding of its financial condition. Your balance sheet includes key information on a specific date rather than your business’s profitability over a set period. It helps to show your business’s stability and how much liquidity it has. A balance sheet will include a list of your business assets, its liabilities, and the equity you have in it. The information included in a balance sheet can help show your business’s net value, your debt, how well your assets are being managed, and whether you are easily able to convert assets into cash when necessary. You can also see changes in your equity, earnings, inventory, and accounts payable and receivable by comparing information from your balance sheets.

Cash Flow Statements

You can use your cash flow statement to determine whether you have enough money coming in to sustain your business operations. Even if your business is profitable, it can still fail if you have cash going out of your business faster than it’s coming in. Reviewing your cash flow statement can help you to better manage where your money is going to increase your business’s chance of success.

Investors want to see cash flow statements to see evidence you can manage your business’s cash and have the resources to handle times when gaps in the in-flow of cash occur.

Find an Accountant for My Small Business

TMD Accounting offers small business accounting services and can help you set up and understand your business’s financial statements. Working with our experienced South Jersey accounting professionals might help to improve your business’s profitability by identifying areas that need work. To learn more, schedule a consultation by calling us at 1-856-228-2205.

What Financial Statements Does A Small Business Need?

Many business owners are intimidated by those financial statements. However, you need to learn some of the basics of these statements to get a clearer picture of your financial health. No matter how big or small your business, these three financial reports are vital to your success. The balance sheet, income statement, and cash flow statement are must-haves for your business. Let’s break down how these sheets work and affect your small business.

Balance Sheet

The balance sheet is also called the statement of financial position. This financial statement tracks your liabilities, assets, and owner-held equity. The balance sheet can indicate the approximate cash value of the business. Lenders will look at your risk and collateral, which can affect if you will receive funding for your business when you need it. There are two vital parts of the balance sheet: assets and liabilities.

Assets are everything that a business owns. For example, some assets can include signed service contracts or showroom stock. There are two types of assets: short- and long-term. Short-term assets will last for one year or less and can include cash, prepaid expenses, and inventory. On the other hand, the business must own its long-term assets for over a year. These examples include tools, property, and equipment. A company may also own intangible assets such as trademarks, copyrights, and patents.

Liabilities are everything that the business owes to a vendor or creditor. A liability may include a business loan balance. Like assets, there are short- and long-term liabilities. A business must pay all current liabilities within a year, including small business loans, payroll, and lines of credit. Long-term liabilities, including deferred income tax and mortgages, are paid over longer periods.

Along with assets and liabilities, owner-held equity is equally important. This equity is the cash value of the company. It is calculated as the assets minus those liabilities. The amount left over is the owner-held equity.

Income Statement

The income statement is often called a profit and loss statement. This statement accounts for the business’s revenues, gains, expenses, and losses. With this statement, you can gauge the profitability of the current operations. You can also use this statement to decide whether to cut or expand operations.

There are several parts to an income statement. Revenue is the income from operations and accounts. You can gain revenue from primary activities or secondary activities. Some primary activities include services rendered or product sales. Secondary activities include rent from a vacated space or accruing interest from an account.

Gains come from other future income, such as selling your assets. Expenses are derived from operations. Like revenue, these expenses can come from primary or secondary activities. Primary activities include expenses incurred from maintaining normal operating revenue. Secondary revenue often includes expenses incurred outside of the operating revenue. Losses are the value loss from selling assets, such as settling overdue taxes.

With this statement, you can see the profitability of the company. Income statements are formatted in two ways: single-step or multi-step. In a single-step statement, there will be one category for income and the other for expenses. However, these statements are not always reliable as they cannot calculate the profitability and efficiency ratio. For that reason, many small businesses use multi-step statements to separate the expense account based on their functions. Multi-step statements give owners a more rounded view of their financial health.

Cash Flow Statement

The cash flow statement is a detailed accounting of the cash generated by the business. How does a cash flow statement differ from an income statement? The income statement shows what the businesses have generated on an accrual basis. The cash flow statement will show the actual funds that have come into the business accounts. With these statements, you will know how much money is available to pay expenses or invest in the business. Any significant discrepancies between the cash flow and income statements could mean problems in business operations.

There are critical points in the cash flow statement. The operating cash flow statement is the cash paid from and to your account from the actual business operations. The income and expenses from selling and buying assets are called the investing cash flow. Investing cash flow can include buying operating equipment or selling real estate assets.

The cash actions related to the company’s stocks and bonds are called the financing cash flow. This cash flow might include paying dividends to the owners of repurchased stocks. When an owner draws on a small business account, that is known as a financing cash flow.

Cash flow statements can include other details, including document losses and gains of non-cash assets and miscellaneous cash actions. When you put this information together, you can see the location of the cash and how it moves in your business.

Understanding your financial statements can be complex. Finding reliable small business accounting services can help you to create and decipher these statements for your business. Knowing your finances is vital for any business. Without these statements, you will not know the financial health of your small business.

Need a South Jersey Accountant for My Small Business?

At TMD Accounting, we have small business solutions for you. Our family-owned and -operated South Jersey accounting firm has helped those businesses in Gloucester County for over 40 years. Whether you need help with payroll, taxes, accounting, or bookkeeping, we are your flexible and affordable way to manage your business. Schedule your consultation by calling 856-228-2205.

Types of Errors in Small Business Accounting

When you have a small business, you do not want to make any type of accounting errors. These errors could throw off your books and lead to penalties from the IRS. If there are errors, it is crucial to spot and correct them. Here are some of the types of errors found in small business accounting.

Error of Duplication

Sometimes, you may have recorded a debit or credit twice in the books. Many of these errors are made when several people handle the bookkeeping duties. Also, when more than one invoice is sent to your business, you may put a double entry in the books. While many duplicate entries are minor, those significant amounts can seriously impact your business, leading you to understate or overstate your income.

Error of Omission

On the other hand, if you fail to enter a financial transaction in the books, that is known as an error of omission. These errors can overstate or understate your income and affect the balance sheet. For those errors of omission in the accounting process, it can significantly impact the trial balance, which is the report for the accounts in the general ledger. Anytime you misplace an invoice or receipt, it can lead to those errors of omission in your accounting books.

Error of Original Entry

This type of error means that someone entered incorrect information into the books. A receipt or invoice should back up all entries. In this case, an individual made the original entry, but the bookkeeper may have transposed the numbers. Like other errors, this one can have a significant impact on the books.

Error of Commission

In some cases, the numbers do not make it to the right place. Errors of commission occur when the item is entered in the wrong spot. For example, you could post the items to the accounts receivable account rather than the account payable, or someone had applied a customer’s payment to another invoice. These errors can affect the balance sheet and income statement.

Compensating Error

In some situations, one account error is balanced out by an error in another account. For example, an incorrect entry in the inventory and a corresponding error in the account payables may cancel each other. These errors do not affect the trial balance since they are both opposite and equal, but they are still errors in your books.

Error of Principle

When an accounting error is made on both sides of the transaction, that is known as an error of principle. Often, these errors happen when the individual recording the transaction does not grasp the basic accounting principles. For example, a fixed asset purchase is entered as an operating expense. These errors will not affect the trial balance. One way to correct these issues is by hiring a professional to handle your books.

Error of Entry Reversal

You may find those reversing entries at the end of the accounting period. In some cases, a credit will be posted as debit, or an invoice is listed in the accounts payable instead of accounts receivable.

Preventing Business Accounting Errors

You can prevent those accounting errors with a few tips. First, you always want to have someone capable of understanding accounting and bookkeeping in charge of the entries. They should be accurate with their typing. In many cases, transposing numbers can throw off an entire ledger. Your would-be bookkeeper needs to understand those financial statements and know where to enter the entries.

While it may be tempting to handle the bookkeeping and accounting yourself, hiring a professional team can make life easier for everyone. An experienced firm understands the basics of the bookkeeping and accounting world. By using professional services, you can ensure there will be no entry mistakes in those books. You can save money using a friend or family member, but an experienced and reputable accountant must adhere to specific guidelines to produce accurate reports for your small business. Get some peace of mind and hire a professional for the job.

When you hire a professional bookkeeper, they will compare bank accounts to the accounting ledger. With that, they will correct any errors before those mistakes lead to big problems. Bookkeepers will also help you stay on track. Hire those small business accounting services for the job. They will track all your financial transactions, whether big or small.

Errors Can Be Costly

As a small business, you need to understand your costs. All businesses need to know whether they are operating at a loss or profit. With those mistakes, you could underestimate or overestimate your costs, leading to financial problems down the road. One error can cause many headaches for your business, making it a nightmare to straighten out. Plus, you can even face penalties from the IRS if that mistake leads to filing incorrect taxes.

While mistakes can happen, and no one is perfect, you need accuracy with your financial statements, balance sheets, and the rest of your books. Hiring a reputable and experienced bookkeeping and accounting firm can help you avoid those mistakes.

When you need a South Jersey accountant for my small business, reach out to TMD Accounting. We are a family-owned and -operated business that has been serving the community of Gloucester County for over 40 years. Our team has helped many small businesses in the area. We are your flexible, reliable, and affordable choice when you need accounting, bookkeeping, and tax services in the area. Schedule your consultation by calling 856-228-2205.

The Importance of Financial Planning for Small Businesses

One of the driving factors in ensuring your business is successful is whether you have a strong financial plan. The plan you create should control how you operate your business over a set period that depends on its projections. Financial planning is a process through which you assess the competitive environment, the goals you have for your business, the resources you need, your budget, and the risks that could arise. In other words, your financial plan helps to prepare you for the future. Regardless of the industry in which your business operates, financial planning is essential. The accounting team at TMD Accounting is prepared to assist you with the process no matter your business type.

How a Financial Plan Can Benefit Your Business

There are multiple benefits of financial planning for small businesses. Below are some of the key advantages planning can offer.

1. Helps to Define Your Goals

Having clearly defined goals can help you understand what your business wants to achieve over the next year or more. For example, if you are trying to create a product to fill a market need, you use your plan to create benchmarks to ensure you are on target. No matter what the goals for your business might be, having them clearly defined in your financial plan can help to provide a roadmap to guide your actions.

2. Helps to Manage Cash Flow

In your financial plan, you will include information about your business’s expected cash flow. While you’ll likely initially spend more than you have coming in, you will have to determine the expense level that is acceptable and establish ways to keep your business on track by easily measuring its cash flow.

3. Assist You With Setting Your Budget

During the financial planning process, you will set your business’s budget. Starting with your overall budget for the quarter or year, you will then break it down into specific, smaller budgets for different areas of your business while ensuring that how much you allocate to each is ordered in importance. A budget helps each team to understand its constraints and the resources it has available to meet its goals. Setting individual budgets for different teams can also help you to track the progress of your company and its spending overall.

4. Identifying Areas for Cost Reduction

Financial planning helps you identify areas in which you can save money. If you’ve been in business for a while, you can first review what you’ve spent and how quickly your business is growing. Identify unnecessary expenses and those that are over-inflated, and trim them accordingly in your budget for the upcoming year.

5. Mitigating Risks

A great aspect of financial planning is that it helps you to identify and mitigate risks that your company could face. You should include controls for inefficiencies, losses that can be covered with insurance, and protection against internal theft or fraud. A part of financial planning involves identifying the risks that apply to your particular type of business, ordering them in their order of priority, and determining strategies to implement to mitigate risks to help to reduce your chance of losses.

6. Managing Crises

Having a plan in place can be helpful whenever your company faces a crisis. During a crisis, you should review and rework your financial plan accordingly to include your response and which strategies to employ.

7. Easier Fundraising

If you need capital funding from an investor or bank, one of the first things you will be asked for is a copy of your business plan. Investors want to know what your plan is for growing your business, the risks you face, and how you will use your money wisely.

Your financial plan should provide all of these types of information to prospective investors so that they can get a clear idea of your business goals and the projections you have about the future. Even if you are not currently looking for funds, having a plan can come in handy if and when you are.

8. Serving as a Roadmap for Growth

Your financial plan helps you assess your business’s current situation and project where you see your business going in the future. Your larger business plan will accomplish these goals on a broad level and discuss information about your target markets, how many employees you need, and the services or products you plan to offer.

The financial section of your plan should include data showing how you will work to reach your goals and what you will need to invest to get there. Determine how much you expect your business to grow, the expenses you’ll have, and how much revenue you project to come in.

9. Building Trust Through Transparency

The financial planning process can help your company to build trust with both investors and your staff. When you are transparent with your employees, it helps to build their trust in you and your business. Employees want to know that the company they work for is managed effectively and working to be successful. You can share your financial plan with your employees in meetings so that they can also offer input from their experiences.

Talk to a South Jersey Accountant for My Small Business

If you are searching for small business accounting services and help with your financial planning, speak to the professionals at TMD Accounting. We are a full-service accounting firm that serves companies in many industries. Call us today to schedule an appointment at 1-856-228-2205.

Tax Deductions for Small Business Owners Working From Home

Many small business owners have a space inside their homes where they work. These business owners can make certain deductions on their taxes. Remember, there are a few rules from the IRS concerning these write-offs. If you want to know what tax deductions you can take, here are a few points to consider.

The “Exclusive Test”

While you may work out of your home, not all spaces can be claimed as a home office. According to the IRS, you must be able to show that a portion of your home is a principal place of business. You must exclusively use that space to work. If you don’t have a dedicated space in your home, you cannot take the home office deduction. This is known as the “exclusive test” by the IRS.

For example, a spare room in your home can be claimed as a business office and deducted from your taxes. However, you cannot claim a living room or bedroom because those areas are used for personal purposes. There are a few exceptions, such as individuals using their home as a daycare or businesses storing inventory in the home.

You must also be an independent contractor or registered business owner to take the home office deduction. Anyone working from home as a business employee is not eligible for the deduction. The IRS rules about this deduction can be confusing. If you have questions, our small business accounting services can help to address your concerns.

Will These Deductions Cause an Audit?

Some people worry whether taking the home office deduction will cause the IRS to audit their returns. Yes, the IRS does have strict rules, but you will not get an automatic audit with these deductions. There are ways to reduce your chances of an audit.

First, you will want to ensure you qualify for all those deductions. Maintain accurate records of your purchases and expenses. You will want to keep those personal and business expenses separate. The IRS has a system that can detect any red flags. For example, the system will compare your situation with others in your industry. Making higher claims than the average person in the industry could signal a problem with the IRS. Remember that IRS audits are rare, but you should always be prepared with the proper paperwork and documentation for your deductions.

Tax Deduction for a Home-Based Business

Those home office-related deductions are based on the percentage of space that you use for the business. You will need to divide your office’s square footage by your home’s total square footage. With that number, you can deduct the right percentage of each home expense. Sometimes, you can deduct your office’s homeowner’s insurance and association fees, mortgage insurance, and cleaning service. Utilities can also be deducted from your business taxes, including electricity, water, phone, and internet.

If you make upgrades or repairs to the space, then you can write those expenses off. However, the amount of the write-offs will depend on whether the repairs benefitted your office or the entire home. While you may want to deduct every expense for your home office, you really need to hire a professional to look over your business taxes.

Over the years, the IRS has been cracking down on fraudulent deductions. You want to make sure that these deductions are appropriate for your situation.

Other Business Expenses

What else can you deduct from your taxes? There are plenty of standard deductions for other business expenses. For something to be qualified as deductible, that expense must be considered “ordinary and necessary.” What does that mean? The expense must be common and also helpful for your industry. For example, you cannot take a lavish vacation and deduct the expenses, claiming it was a necessary part of your business.

There are some common business expenses for your taxes.

If your business manufactures products or purchases items for resale, then you can deduct the cost of goods sold. You may write off direct labor costs, factory overhead, storage fees, and the cost of the raw products on your taxes.

Capital expenses are the costs that are required to operate your business. There are three types of capital expenses: business assets, improvements, and startup costs.

You may deduct certain car expenses if you use the vehicle as a part of the business. Like the home office write-off, you can deduct a certain percentage of the car’s usage. For example, business owners can calculate the miles driven for business purposes to receive a deduction.

You might be able to deduct rental expenses if you do not own the business property. In some situations, the interest could be deducted if an owner borrowed money for the business. You can also deduct state, local, federal, and foreign taxes from your taxes.

Travel expenses are also eligible, but you can only claim them if you reimburse those costs under an accountable plan. Once again, travel expenses must be related to the business and not for personal use.

Any supplies or materials are deductible from your taxes. Plus, professional services are also considered a business expense. You can write off those fees from a lawyer, bookkeeper, or an accounting firm.

Finally, all of your business development and marketing expenses are eligible for a write-off. These business expenses are used to find and keep clients. With that, you can deduct them from your yearly taxes.

Many people are hesitant to take some deductions off their taxes. The IRS provides detailed explanations of these expenses on their website, which can help you determine what is eligible for a deduction. Completing your taxes can be challenging, especially for small business owners working from home. You may want to find an experienced accountant for your small business to help make the correct deductions on your taxes.

Need a South Jersey Accountant for Your Small Business?

At TMD Accounting, we have over 40 years of helping small businesses in the Gloucester County area. Our team can assist with your taxes, payroll, and bookkeeping needs. When you need a flexible and affordable option, we are here to help. Schedule a consultation by calling us at 856-228-2205.

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