Recording financial transactions is the top priority for all businesses. While every financial document has its own importance, a Balance sheet is one that defines the financial health of a business entity at a given point of time. Balance sheet of a business contains enough financial data of an organisation to determine the growth of the company as well as predict its future expansion plans.
However, accounting mistakes can lead to discrepancies in the balance sheet that can prove to be costly for businesses. Here we will be discussing some common balance sheet mistakes that even professional Accountants and Bookkeepers can make and to avoid them.
Avoiding Balance Sheet mistakes:
Before we hop on to the discussion straight away, here’s a basic understanding of the formula that a Balance sheet operates upon and how each entity contributes:
- Assets – Anything that the business owns and has monetary value
- Liabilities – It includes the debts a company owes to others
- Shareholder’s Capital or Equity- This includes the total amount invested by the Shareholders
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It is a common balance sheet mistake to miss out on recording transactions like personal expenses, inventory, or any other financial transaction. Even professionals can face this situation where a transaction just slips out of their mind.
Recording transactions incorrectly
Mistakes are inevitable and a core part of human nature. Many times, business owners and accountants can be in a spot where they unknowingly record a transaction wrong. Don’t worry you aren’t suffering with Dyslexia if you record 71 as 17. It is a common transposition error and can be rectified easily if you double check the balance sheet. This is why many business owners prefer cross-checking the entries of their bookkeepers.
Missing out on recording inventory changes
Have you forgotten to record inventory changes?
Take it easy, it’s a common balance sheet mistake. At times even the easiest tasks are prone to mistakes. Make sure that you are doing your books on a regular basis since too much work can make Jack a dull boy and he can make such mistakes.
Classifying data incorrectly
As discussed earlier, Balance sheet works on 3 primary entities(assets, liabilities and equity). Inaccurately classifying your transactions can disrupt the balance sheet formula that it works on and can result in major errors. However, this is one mistake that professionals won;t make generally but in any case, proper classification of business transactions is imperative to avoid such errors.
Business owners who do their books on their own should re-verify the classification of their transactions with an accountant.
How to avoid balance sheet mistakes
Above discussed mistakes are pretty common and can create data irregularities within the balance sheet. Here’s how you can avoid them:
- Conduct a trial balance before creating your balance sheet
- Review and update balance sheet transactions regularly and double check them for common errors discussed above
- Keep your financial documents well-organized to avoid any hassle
- It is always advisable to seek professional help
From obtaining a business loan to better understand your business performance and liquidity position, balance sheet is a crucial business asset and its importance shouldn’t be overlooked.
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Every small business owner wants to save some money. Small business tax deductions can help you save that money. Taxes can be complicated especially for small business owners.
What is a tax deduction?
A tax deduction also known as tax write-off is an expense that you can deduct from your taxable income. Tax write-off allows you to pay a smaller tax bill. You take the amount of the expense and subtract it from taxable income. The expense has to fit the IRS tax deduction criteria.
When you deduct an expense on your tax return, you’re lowering your taxable income and thereby reducing your tax liability. This means you have more money to invest in your business by reducing the amount you owe to the IRS each year.
Following are the most common tax deductions for small business:
Most small businesses use a car, van or a small truck for business purposes. Cars can be used to drive for meetings with the clients or using a light truck to transport equipment. When it’s time to pay the taxes, you can choose to deduct your actual expenses such as gasoline, parking, toll, maintenance etc. OR you can choose a straightforward route of using the IRS standard mileage rate i.s. 58 cents per mile. So for example you drove 3000 miles for business purposes , you’ll be able to deduct $1740 off your taxes.
The option you choose depends upon how economical your car is, how much it costs you to drive throughout the year, and how well you have documented your car related expenses. So, it’s better you start saving those receipts.
Are you utilising part of your apartment as a home office space? If yes, then this is great news for you! You will be able to deduct expenses for the business use of your home, which include mortgage interest or rent,real estate taxes,housekeeping or landscaping service,homeowners association fees, insurance, utilities, repairs and depreciation. This deduction allows small business owners to deduct $5 for every square foot of your home office for upto a maximum of 300 square feet.
This type of deduction is ONLY allowed for you to use your home office space for business purposes on a daily basis.
Qualified Business Income:
According to the new tax law, small businesses including S corporation, partnership, sole proprietorship, LLCs will be able to deduct 20% of their income on their taxes. The Tax Cuts and Jobs Act of 2017 made significant changes to the tax code. For small businesses it was the creation of qualified business income deduction. For example you have earned $1,00,000 in profit, so now you can deduct $20,000 before ordinary income tax rates apply to you.
However, there are few limits to claiming this deduction. Once your income exceeds $1,57,500 for single filers or $3,15,000 for pass-through business owners who file a joint return, this deduction will phase out. To see if you’re eligible for this pass-through entity deduction also known as 199A deduction reach out to tax pro.
As we all know rent is always going up. The cost of renting a space for your small business is deductible, it includes a shop on a busy downtown street, a cupcake shop, an office space for a travel agency etc.
Advertising and Marketing:
You are eligible to deduct the cost of printing business cards on your tax return. So, basically anything you use to promote your business to bring in new customers from social media ads to billboards, all is 100% deductible. All this includes launching a new website, sending cards to clients, sponsoring an event, hiring someone to design a business logo, running a social media ad campaign etc.Great News! Isn’t it? But remember you cannot claim, amount paid to influence legislation i.e. lobbying or sponsor political campaigns or events.
Office supplies and expenses:
Every business requires stocking up on traditional office supplies such as printer inks, pens, post-it notes. These office supplies are totally deductible. Also, if you have bought a new laptop, smartphone or some software that you can use for your small business during the year, you can write-off the entire cost of that expenses. You can also deduct work-related postage and shipping cost if any. Be sure to document all receipts for office supply purchases.
You’re in luck! Everything you spend on utility bills (electricity, phone, internet, water, heat and sewage) for your business is fully deductible.
If you require to repair your office property or it just requires regular maintenance to keep running efficiently, you can write off these costs on your taxes too.
Many small business owners have to travel for business purposes. But of course! These expenses of travelling and staying comes with a price. But there is some good news here! You can deduct those expenses for you and for your employees if the trip is taken for a business purpose. For a trip to qualify as a business purpose, it must be ordinary, necessary and away from your tax home. The business travel expense includes the following:
- Parking and toll fees
- Meals and lodging
- Business calls
- Dry cleaning while on business trip
- Using your car while at a business location
- Travel to and fro from your destination by plane, train , bus or a car
- The cost of public transportation used on business trip
- Just keep in mind to save all the receipts and keep detailed records from your travels.
If you have taken those meetings out for meals with your clients, well you’ll be able to deduct 50% of the cost for business lunches only if:
- The expense is an ordinary and necessary part of carrying your business
- The business owner or employee must be present at the meal
- The meal cannot be lavish or extravagant under certain circumstances.
The cost of providing meals to your employees at a company picnic or a holiday party are fully deductible. Be sure to keep the documentation for the outing that includes the amount of each expense, the date and place of meal and the business relationship of the person you dined with.
But remember, ‘entertainment expenses’ with your clients like sporting, events or concerts are not deductible.
Salaries and Employee benefits:
The wages, salaries, bonuses, commissions, vacation time paid are all tax deductible business expenses for your employees. You can also deduct contributions to their retirement plans, education assistance and most other employee benefit program costs. If you have freelancers or contract workers you pay is also tax deductible. This applies only if it fulfills the following criteria:
- The services were actually provided
- The salary is ordinary, necessary and reasonable
- The employee is not a sole proprietor, a partner, or an LLC member.
There are many taxes that you can write off. You can write off $10,000 of state and local income tax, sales tax, real estate tax and personal property taxes. You can also deduct the following taxes:
- Excise taxes
- Franchise taxes
- Occupational taxes
- Payroll taxes
- Fuel taxes
- Business licenses
- Part of your self-employment tax
Every business needs to be protected. To protect it by insuring your business. The cost for insurance premiums like property coverage for your furniture, equipment and buildings,liability insurance, fire and flood insurance, malpractice insurance, workers compensation coverage, auto insurance for business vehicles, business owner’s policy are all deductible. Medical insurance for your employees is also tax deductible under certain circumstances.
Legal and professional fees:
You have the right to deduct and legal or accounting fees charged by attorneys, bookkeepers, and accountants that are related to your business operations.
Telephone and Internet expenses:
If telephone and internet are integral to your business, they can be deductible as well. Keep in mind, if you have a landline at home , you cannot deduct the cost of your first line even if it’s used for business purposes. However, if you have a second line at home used for business purposes , the cost of this line is 100% deductible. If you use a cell phone and internet both for personal and business use, you can only deduct the percentage allocable to business use. In case you are audited, keep an itemized bill and details of records to prove the amount of business use.
One of the simple ways to reduce your income tax bill is by claiming all the tax deductible available for your small business. Consult with your accountant before claiming a deduction on your tax return.
Covid-19 has brought the economy to a halt. The global Lockdown have made it almost impossible to churn the vehicles of the economy and its revival in the future is also something that is dependent on how fast we can fight the pandemic. The IRS has come to the taxpayer’s rescue and has come out with a series of benefits, protective regulations and tax relaxations to ease everyone during these times of uncertainty.
Predominantly, all the tax deadlines that were pending for the financial year 2019 and were falling from April 1- July 15, have been extended to July 15, 2020. A list of relieving measures have since been taken to reduce stress and financial burdens during Covid-19. Additionally, individuals who still cannot adhere to the July 15th Deadline can again ask for extensions from the Department of Treasury and the IRS.
Who All Are Eligible for the New Tax Deadlines?
The new tax deadlines are applicable to all taxpayers, whether they are individuals, freelancers or filing for self-employment taxes. These umbrella relieving measures are applicable to everyone. There is no need to file for the acceptance of this relaxation of deadlines. All the taxpayers are automatically eligible for these new IRS tax relaxation deadlines.
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Does This Relaxation Depend on All the Taxes?
Almost all the IRS tax deadlines that fell under the umbrella dates of April 1- July 15 have been an extended relaxation date till July 15. Although, it is important to note that there are differences in how the different states have responded to these IRS deadlines. Here are those below:
|Arizona, Arkansas, Connecticut
||Announced plans to end this year’s regular legislative session.
||Announced Special Sessions to Be Held at the End of the Year.
|California, Delaware, Kansas, Maryland
||New Revenue Forecasts Have Been Announced in These States.
||April sales tax deadlines have been extended to May.
||The Budget for the Financial Year 2021 has been Proposed.
||Legislative Administration Has Further Been Postponed.
||Veto Power Has Been Postponed Indefinitely.
||Spending in the Financial Year 2020 Has Been Frozen.
||Bill Has Been Enacted to Codify the Income Tax Extension.
||The Board of Equalization has Officially Announced Revenue Shortfalls, and Will Make Use of Any Rainy Budget to Fill the Gaps.
||Legislators Will Not Be Filing the Budget For Financial Year 2021 Until August or September.
||Biennial Budget for Financial Year 2021, 2022 Has Been Put in Effect.
||Taxpayers Who Are Applying For a Tax Waiver, May Avoid the Payment of Cannabis and Alcohol Excise Taxes.
|District of Columbia
||FY 2021 Budget to be Presented on May 12. The Rent Has Been Frozen On Commercial Tenants as Well.
(All Information Updated As Of April 23, 2020)
How to File For Extension Beyond July 15, 2020?
If you need to file for an extended relaxation that goes beyond the July 15th extension, then you need to follow the steps below.
1. You can seek an extension by filing Form 4868.
2. Businesses who need additional time need to file the form 7004.
The IRS and the Department of Treasury are taking multiple measures to ease citizens and businesses during these times of uncertainty. Tax Relaxation Deadlines to July 15th 2020, is one of the measures to help relax this economic slowdown. The IRS continually comes out with recent updates in the changes that are occurring and any new relief measures that are being taken. You can click here to know more.
The Covid-19 pandemic has taken the world by a storm. It’s global economic and financial impact is being felt presently, and is estimated to stretch in its effect in the future as well. While the pandemic continues to expand, the IRS is taking sweeping measures to safeguard people and their businesses. The Internal Revenue Services is extending programs with the three principles of working together with people, focused largely on their well being and helping each other and the less fortunate.
With the entire fiasco overlapping with the tax deadlines and important year-end dates, the IRS has taken various measures to ease the period. Here are some tax benefits and strategies you can avail of during the Covid-19 lockdown. The proper usage of which can help your business sail through with minimum effect during this period.
The Four R’s to Safeguard Your Business During Covid-19:
Before you plan your taxes, here is your holy grail to strategize your business logistics today, and make your business Covid-19 secure!
Resolution: The first is to address the problems that your business and workforce are facing immediately due to the virus. Be it, in terms of technology, safety, and your clients.
Resilience: Address the cash management issues that can be faced by the business in the long-term. Preparing right from the start can help you in these times of uncertainty.
Returning: Already start charting a plan of action for your business for the time when it returns to normalcy.
Reimagination: While charting a policy of return, reimagine what the new normal would be. When you apply the idea of what the future can be, you will be able to make better plans and strategies to get you and your business back on track.
Tax Benefits to Avail During Covid-19:
Economic Impact Payments: These are the payments that the IRS is automatically distributing to people within a definite income range. In most cases, there are no actions required by the people in return for the same. Following are the requirements for the Economic Impact Payments:
- If you are a tax paying individual with a gross income of $ 75,000 or a married couple jointly filing taxes with a gross income of $ 150,000; you are eligible to get the entire amount of the economic impact payments.
- This amount is automatically distributed by the IRS on the basis of the tax returns that have been filed either in 2019 or 2018. (Click here for more information)
Employee Retention Credit: With the pandemic raging, the government is urging to retain employer strength, so as to minimize the lay-offs. In the same direction, the IRS has proposed to extend Employee Retention Credit. This is a refundable tax credit of upto 50% for wages paid upto $10,000, for businesses impacted by COVID-19.
- Wages paid after March 12, 2020 to January 1, 2021 will be eligible for the Employee Retention Credit.
- If the employees are less than 100, then whether they are working or non-working, the ERC, will apply for wages upto $10,000.
- If the employees are more than 100, then the ERC will apply only to the working employees with wages upto $10,000. (Click here for more information)
People First Initiative: IRS is trying to be a part of the solution by being in these times together with people and businesses. From extending the tax deadlines to adjusting the consequent compliance actions. The projected start date for the extensions will start from April 1 and will work on till July 15.
- All the installments due to be paid between April 1 to July 15 are suspended. (If preferred so by the individuals.)
- However, the interest on the due amount will still continue to be the same.
- The IRS is also reminding people who have not filed their tax returns for the last three years. As there are cases where they are owed refunds and adjustments. Doing so at this time will help them furthermore.
- Overtaking of personal properties and residences in the wake of liens and levies will also be suspended during this period.
- In the case of high-income individuals, the activities and proceedings will be undertaken as usual.
- In the wake of private debt collection, no fresh delinquent files will be extended for private collection during this period. (Click here for more information)
July 15 is the new tax day: All the treasury and IRS tax penalties and deadlines have been extended to this date. Even the income tax payments can be deferred to 15 July to 15 April without any penalties, if preferred so by the taxpayers.
Employer Payments for Providing Leaves: The IRS has made it necessary to provide 80 hours of paid sick leave and childcare leave. As a benefit of which, the employers who extend such payments can save the amount paid on their eventual payroll taxes. This way, there can be a true balance and equal benefit to both the employees and the employers.
Get Ahead of Covid-19:
It is important to stay home, stay safe and fight the virus. It is also important to take the same care of your financial health during these testing times. With the correct business strategies and by availing the plethora of benefits being extended by the IRS, you can greatly benefit.
The various tax relaxations, employer-centric tax refunds and the financial benefits that have been carefully calculated and meticulously extended by the IRS are going to help your business in these times of adversity.
Watch this space for more accounting tips, tricks and expert insights into how you can ace the tax season in the times of Covid-19.