Well, here it is the middle of March and you haven’t done your taxes yet, right? And, you’re a small business owner, too, right? Well, where do we start?
Start By Calculating Your Income
I could go on about how you should have started last year in January keeping your books on a spreadsheet or with Quickbooks or something similar, but that wouldn’t do us any good now, would it? So, how about we do this…Gather all of your invoices or cash register receipts or whatever document you used to determine your income. You do have something like that, don’t you? You didn’t just take cash and put it into your pocket, did you? Hopefully not! (Shame on you, if you did!) Ok, so now with your trusty calculator (TC), add up all of those invoices. (You may be liable for sales tax, too, but we’ll save that for another time.) Ok, I always recommend you add up columns twice to make sure you get the same number twice. I’ve found over the years, a calculator that prints out a tape is invaluable for this type of work. Now, write that down on your yellow-legal-pad (YLP) and call it, “INCOME – 2013”
Then, Calculate Your Expenses
Alright, now, take all of your expenses – either paper receipts or checks (but not both) – and put them into piles. Those piles might be “advertising”, “supplies”, “materials purchased”, “utilities”, “repairs”, etc. The point is to categorize your expenses according to some rhyme or reason. This is called, “Organization”. Now, within each of those categories, total those receipts or checks up using your TC, remember to total them up twice, and write down your number onto your YLP, and call it whatever that expense pile was. It is helpful to staple those expenses together so that they won’t get thrown into some other pile. If you are using printing calculator, take the tape and wrap it around your pile of expense receipts/checks.
As you’re going along on this process, you may find that you purchased some equipment, like a desk, chair, filing cabinet, woodworking equipment, etc. Items like that must be “depreciated” and not expensed. “Depreciation” is an allowance the government gives you over a period of years to write off a piece of equipment. If you bought something that cost $20K and you wrote it off in the year you bought it, it would negatively impact your financial statements. So, you don’t want to do that.
Report These Numbers in the Right Place
Now, once you’ve gotten your income and expenses down on your YLP, you can total up all of your expenses and subject that number from your income to arrive at your Net Profit. This figure you’ll carry over to Line 12 of your Form 1040. This is true if you are a Sole Proprietor. If you are incorporated or a partnership, we’ll have to go a little deeper and that would be another discussion for another time.
How could have avoided all of this hassle? Well, for starters, how about using a bookkeeping system like Quickbooks, or a similar product, throughout the year? And, if you keep up with it by posting your expenses and income on a regular basis (like, daily or weekly!), and reconciling your bank account at the end of each month, come the year-end, your profit and loss (P & L) is just a few clicks away! And, you could spend a day or two fishing or lounging on the beach, instead of shuffling receipts around.
This is the greenhornet blog, written by Raymond D. Nation, EA, owner of a Liberty Tax Service office in Hampton VA. I’m also on WNIS, 790 AM radio on the 1st and 3rd Wednesdays of the month until April 15 at 6:05pm on the program, Ask The Experts. Check it out!