Resolve to be a tax-savvy small business in 2022. Here’s how.

If you are a sole proprietor or small business owner without a dedicated bookkeeper or finance staff, there’s a decent chance you aren’t doing the basics.

But it’s still the beginning of the year. There’s still time to put in place some best practices around record-keeping and retirement planning.

Here’s the wrong way to do it: Let the receipts pile up. Manage your business finances according to what money happens to be in the bank. If your checking account has money, spend it. If your checking account doesn’t have much money, save it. At the end of the year, turn over your receipts and accounting software to a tax preparer and wash your hands of the process. Rinse, repeat.

Unfortunately, that’s the default mode for a huge swath of small businesses, according to Cindy Montoya, owner of KAC Consulting in San Antonio. Eight years ago, she quit her CPA firm to set up her own practice targeting the kinds of small businesses usually overlooked by big firms.

Restaurants, she found, notoriously neglect their financial bookkeeping. Service providers in the trades — electricians, plumbers, landscapers, construction contractors — similarly are untrained and largely ignored by the bookkeeping and tax preparation industry. These service providers are often self-employed or work as independent contractors for larger construction companies.

Montoya says she got into serving this clientele because of her own family. Montoya had grown up keeping the books for her dad, starting when she was just 12 years old, as he ran a small business in Houston. Later in life, Montoya’s husband was typical of her clients.

Income tax forms. (Dreamstime/TNS)

Income tax forms. (Dreamstime/TNS)

Dreamstime, HO

“He was a general contractor. You put finances in front of him and forget it, it’s not going to happen,” she said.

Describing her typical small business client now, she said, “They need a lot of hand-holding about how to run their business, how to plan for taxes and how to not drive your business looking in the rear-view mirror.”

The “rear-view mirror” is Montoya’s analogy for the wrong way to do things, kind of like I described above.

If she could give small business owners one New Years’ Resolution to make, it would be to set up a bookkeeping plan every month.

From the perspective of small business finance, everyday is a good day to start keeping your books properly. But if you haven’t been doing it right, this month — right now — is the time to start.

Bank reconciliation should happen every month. Reviewing key performance indicators (known as KPIs by the cool kids) is only possible if you keep good financial records. Good records mean knowing your up-to-date numbers for revenues, costs and profits.

For Montoya, the ability to speak with her clients on a regular basis — using updated this-month metrics — is the difference between forward-looking tax planning and rear-view mirror driving.

One of the biggest small business myths, Montoya says, is that the goal is to pay no taxes.

“So many small business owners want to buy, buy, buy with the mindset that they are reducing taxes by increasing deductions,” she said. “But this is like using a 20 percent-off coupon for something you don’t need. You are still spending the money, usually on things that go down in value.”

A better goal is to make and keep as much money as possible, which means not letting the tax-minimization tail wag the business dog.

I would add to Montoya’s important point about not optimizing your decisions around achieving the smallest tax bill. Banks and investors really, really want to see annual profits in order to get involved with your business. If your small business ever seeks outside money, you’ll usually need to have profits in the past, which means you’ll typically have had to pay significant taxes in the past. Paying taxes as a small business owner doesn’t mean you’ve failed. It means you’re succeeding.


https://www.expressnews.com/business/business_columnists/michael_taylor/article/Taylor-small-business-bookkeeping-16804320.php

Jinggo B Danuarta

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