July 18th, 2012

Why Good Accounting IS Now More Important Than Ever

It has always been important to have good records in your business.  But today, it is vital.  There is NO excuse.  You must have impeccable records to survive as a small business in this economy.

You must know what your bottom line is to the penny.

Margins are tight.  Taxes are high.  You cannot afford to waste money.  You must know how you are performing as a business; and not just by looking at the balance in your checkbook. 

Forecasting, budgeting, creating pro-forma financial statements and yes, regular financial statements are something the banks require regularly for financing your business project.  They want documents every quarter, at least. 

Too many business owners I meet just do not know; they are guessing, and many times guessing wrong.

Good records are the primary evidence cited by the IRS for business activity.

 Many of you are starting a business.  Is it a hobby?  Or, is it a real business?  If it is a real business, the IRS says you must have business records. 

You need to be recognized as a real business because you want the wealth of deductions that are available to a business operation.  If you are a hobby, your deductions are limited to the gross income you generate from that activity. 

A client who owned a business was being audited.  He also happened to be in the horse raising business.  His main business was profitable, his horse operation was not. 

As we neared the end of the business audit, I asked if the “hobby farm” issue was going to be raised by the auditor.  The auditor said, no.  Why?  Because the records were so impeccable for the business he assumed they would also be in the same condition for the horse business. 

The issue of a hobby business never came up, because of his good records. 

This was a BIG victory for the client because, as you might imagine, his horse losses were substantial.

Without good records, the IRS will just deny the entire deduction.

 Many people think that by writing a check, or swiping your card, you have substantiated the business purpose of that transaction.  WRONG!

If you do not systematically record these transactions in an accounting format, and keep the underlying documentation, the business nature of the transaction will be denied.  YOU WILL LOSE!

Again, I have been in audits with my clients who generated debit card or credit card transactions whose business purpose was questioned by the IRS.  The client could not substantiate the business purpose because, 1) no books were being kept or 2) the underlying source document was not kept.

The IRS denied the deduction, and there was nothing I could do about it.  I had no proof.  I had no ammunition to fight with. 

Conclusion

We help our clients keep good records and accounts.  That is a part of our mission.  If you are ever challenged by the IRS we want you to win!  If you make a big investment in your dream business, we want you to succeed! 

Success starts with good accounts and records.