6 Tips to Simplify Small Business Accounting and Taxes

Posted July 24, 2023

Have you recently taken the plunge into entrepreneurship and started a small business, there are many tax benefits to doing so. But how does a small business owner set up systems to keep taxes and accounting easy to manage in the beginning? Running a small business in a post covid world often struggles with finding a quality CPA and tax firm they can trust.

What are the steps to accomplish this? I recently read an interesting article by Stephen Nelson of Evergreen Small Business suggesting using these six strategies to make your small businesses back-office run more efficiently.

Incorporate as a Sole Proprietorship

Mr Nelson suggests that if someone just started a small business, setting it up, and operating the business as a sole proprietorship can be a good option. Later on, as your business grows you may want to convert it for a variety of reasons to S- Corp. C-Corp or LLC Partnership.

Why?

Pros: From an accounting perspective incorporating as a sole proprietorship, will keep things pretty straightforward for reporting:

You’ll only need a profit and loss statement
Simplifies your taxes
You’ll just report your income on a Schedule C form inside your regular individual income tax return

Cons: There are some challenges and downsides to be aware of:

Liability risks, as a sole proprietor, you’re personally liable if the business gets sued or incurs debts
Sole proprietors must report business profits as personal income, and pay self-employment tax
Raising capital, it’s harder to attract investors because you have no partners, shares, or membership interests

Operate as a Limited Liability Company

If you are concerned about getting sued or protecting yourself from a legal liability standpoint, you may want to consider forming a limited liability company, or LLC. And if the LLC has a single owner—called a member—you’ll get to use the sole proprietorship entity classification. Even though you’ve limited your liability risks.

An LLC isn’t always required, but many small business owners form an LLC for personal liability protection. Having an LLC can also help you open bank accounts, enter into contracts, hire employees, and get necessary business licenses and permits.

Cash Basis Accounting

One of the many financial decisions startups and small businesses have to make is which accounting method to use: cash-basis or accrual. When revenue or expenses happen, it’s your bookkeeper’s job to record these in your company’s accounting system.

Keep your bookkeeping simple by using cash basis accounting. Count income when you receive payments, for example. And count expenses when you make payments.

The alternative to cash balance accounting? Accrual accounting. But accrual accounting greatly complicates your work.

Use Equity Not Debt

Mr Nelson makes a good point by saying that “your capital structure will either make your accounting and bookkeeping harder or easier.”

He suggests bootstrapping in the beginning and using owners’ equity to fund the business. In other words, don’t use a bunch of debt to fund the business. Or parts of the business.

Taking on too much debt can increase your financial risk and it makes your accounting more complex as well.

Keep Your Balance Sheet Simple

Mr Nelson also suggests keeping your balance sheet lean. Cut down on the line items for reporting.

So of course your balance will show cash. Maybe some inventory. But anything else? Try to avoid that.

If you avoid debt, that of course keeps your balance sheet lean and clean. He has a few tips:

Try to avoid putting a bunch of assets onto the balance sheet
Write off as supplies anything that costs $2500 or less. Or that probably lasts less than a year
Don’t buy vehicles and put them onto the balance sheet.
Or anything that IRS considered a so-called “listed asset” which triggers extra reporting. (Cars are listed assets. And so is other stuff that’s likely to be used personally)

Use a SEP IRA as a Pension Option

Mr. Nelson also suggests using an Individual Retirement Account (IRA) to build retirement wealth. Maybe one for your spouse, too, if you’re married.

If you want to put bigger numbers onto your return, look at using a SEP-IRA plan. That’ll let you contribute up to 20 percent (roughly) of your business profit up to about $60,000 a year. (The limit in 2022 is $61,000 but that limit gets adjusted for inflation.)

With a SEP-IRA? You just shuffle some paperwork. And then sometime before the tax return filing, decide whether or not you want to contribute to the SEP-IRA account.

Use an Outsourced Payroll Provider

When or if you hire employees? Outsource the payroll. Do not do this yourself. Or even a worse idea do this for your spouse’s business.

You can outsource payroll to a payroll service provider such as Gusto or ADP. Pay a few hundred bucks a year. And get all your payroll taken care of quarterly returns, tax deposits, W-2s, and so on.

Conclusion

If you are starting to make enough revenue and it gets to a point that it’s time to hire a CPA or bookkeeping firm, do not wait until the last minute. There are still labor shortages in the accounting industry. Mr Nelson points out that It takes about five years to get the schooling necessary to become a CPA. And it probably takes another five years of working experience to be good at it.

Tax planning is a year-round strategy for many businesses.

It is recommended that setup time to meet with CPAs and bookkeepers in the shoulder tax season that falls between April 15 and the fall extended tax return season. If you are a small business reading this and have questions feel free to reach out Huckabee CPA for a consultation.