The new year is right around the corner, and there’s no better time, in my opinion, to take a hard look at your business’s bookkeeping practices. Today, I’m going to lay out a case for why bookkeeping is essential if you want to lower your tax liability and then give you the steps to get there.
What is bookkeeping?
Let’s start with definitions. Bookkeeping is the process of recording the financial transactions of your business, classifying those transactions by type, and organizing them into a single book of record.
Of course, we use software in 2024, but the “book” remains a useful metaphor for visualizing what is critical about bookkeeping: good books allow you, stakeholders, and the government to see and comprehend all of your business’s financial activity in one place.
What are the basic components of bookkeeping?
Invoices, receipts, bills, and orders make up some of the most notable components involved in bookkeeping. As we know, we want bookkeeping entries to be reasonably detailed, and for that, we need at least three values: dollar amount, transaction type, and context.
The greater the detail and specificity, the more productive your bookkeeping will be. That includes the potential for tax savings.
Here’s how detailed bookkeeping helps your business
I’ll keep it simple here and break down the benefits into two camps:
- Provide an accurate picture of your business’s performance—past, present, and, to a certain extent, the future.
- Give your accountant and tax planning partner critical information he or she needs to maximize tax deductions and identify eligibility for tax credits.
So that’s it. How do you measure your performance in a disinterested manner? What is the quality and usefulness, with respect to tax savings, that you can pass along to your in-house accountant or hired CPA? Good bookkeeping is about much more than organization; it’s about doing better business and saving more in taxes.
Bookkeeping plays a significant role in deductions and credits
To recap, deductions are expenditures you can subtract from your gross revenue. Credits are not incurred costs or expenditures but dollar amounts from the Internal Revenue Service (IRS) that are taken directly off your tax bill.
First, let’s talk about deductions. Bookkeeping plays a critical role in your potential to maximize deductions. Examples include tracking mileage, organizing and executing payroll costs, and maintaining paperwork from accounts receivable.
Organized bookkeeping can help you decide if it’s profitable to make advantageous tax decisions. Examples include:
- Converting to electric vehicles
- Spending additional resources to find and hire veterans
- Taking on expenses to provide reimbursements for employee childcare
Now, let’s get to what matters in 2024 for bookkeeping.
1. Keep business and personal spending separate.
Having a dedicated business credit card used exclusively for business purchases and having all business purchases go on that credit card is an excellent first step toward good bookkeeping practices.
Sometimes it’s convenient to pull out a personal credit card or cash. Resist the urge because this practice can create a quagmire that blurs the line between your finances and the finances of your business.
So, the first thing we want to do for the new year is to take stock of our behavior. Have we maintained a clean separation between business and personal spending?
If we do, we don’t have to pull together multiple credit card statements or search through your personal transactions to add up expenditures. And in the face of an audit, you’ll appreciate the separation.
2. Monitor ongoing fixed transactions.
Keeping track of ongoing fixed transactions makes cash flow management and bookkeeping easier.
Tracking can be as simple as creating a spreadsheet with vendors, dates or payments, and amounts (fixed or average).
Make sure to regularly update your spreadsheet because up to 88% of spreadsheets have errors¹, which can lead to accounting errors.
Every business needs steady cash flow to respond to business problems and opportunities and settle its invoices for goods and services.
But with so many expenses—utilities, telecom, and insurance—it can be easy to lose track of accounts payable, resulting in nasty surprises like overcharges.
3. Use the right software to expedite quality bookkeeping.
The right software can help you cut Local travel can provide a significant tax deduction for business owners with non-commuting travel expenses. Unfortunately, local travel is also one of the easiest things to lose track of.
One option is to use an app like TripData to capture how far you’ve traveled. Just apply the standard mileage rate, which incorporates expenses like gas and maintenance, and automate the process.
Keep those receipts. Yes, the paper receipts. Here’s why.
Do software and paper get along? Yes, it’s true. If you’re used to keeping paper receipts, consider using QuickBooks. It’s easy: Take a picture of your paper receipts, input the image into QuickBooks, and the software migrates that information into your books.
4: Streamline your bookkeeping processes.
Small business owners spend around sixteen hours² each week on administrative work, which includes entering bookkeeping details.
A simple, streamlined bookkeeping process makes periodic accounting (quarterly and annually) easier.
One of the most important is a uniform process for invoicing and payments.
Again, options include software and tax professionals. But sometimes, the process can be simple: “All paper receipts that come into this office will immediately go into this file, and all email receipts will immediately be forwarded to this address.”
Finally, the bookkeeping clean-up checklist in five points:
- Get a third-party review of financial statements.
- Collect and categorize outstanding cash and credit card transactions.
- Ask for a comprehensive reconciliation of cash accounts and bank statements.
- Set up payroll processes to keep pace with hiring.
- Upgrade your accounts payable and accounts receivable process.
A proper bookkeeping clean-up is an investment in the future. Why? Clean books at the end of each quarter and the beginning of each year are the only way to get more precise performance metrics, better information for your accountant, and, ultimately, tax reduction.
Do you need help with your bookkeeping resolution? I can help.
Tax savings start with clean books. If you need more accurate, efficient, and integrated bookkeeping, call me. We’ll talk through your options.
Jeremy A. Johnson, CPA
- 88% of spreadsheets have errors [Internet]. MarketWatch. [Cited 2023 Nov. 4] Available from https://www.marketwatch.com/story/88-of-spreadsheets-have-errors-2013-04-17
- 47 Critical Process Improvement Statistics to Drive Change [Internet]. Quandarycg.org. [Cited 2023 Nov. 4] Available from: https://quandarycg.com/process-improvement-statistics/