Top 7 Most Common Bookkeeping Mistakes Made

Top 7 Bookkeeping Mistakes Made

This is Part 8 in our “All About Bookkeeping” series.

If you missed our first seven articles check them out here:

What Is Bookkeeping and Why Do I Need Bookkeeping For My Business?

What Are Bookkeeping Debits, Credits, and Chart of Accounts?

What Is Cash and Accrual Accounting?

What Is An Income Statement vs Balance Sheet?

How Do I Read An Income Statement and Why Is It Important?

How Do I Read A Balance Sheet and Why Is It Important?

What is the Statement of Cash Flows? Any Other Important Financial Statements?

As you can see we have covered a lot of ground in this “All About Bookkeeping” series. To finish it up we have something that I think is extremely important, understanding and realizing the common mistakes business owners make, so you can avoid them!

Before getting into that, I want to forewarn you. I could do articles on bookkeeping mistakes to make up years worth of content. That would be painful for both you and me so my goal here is to give you a glimpse of some of the most common or top mistakes that we see and want you to be ware of.

Mistake # 1

Not doing bookkeeping on a regular basis and not reading and analyzing your financials.

  • Do regular bookkeeping on at least a monthly basis. Continually putting it off causes you stress, anxiety, and a higher likelihood of mistakes.
  • By doing bookkeeping on a regular basis you now have data available to you that you can use to improve your business. Too many business owners do the bookkeeping but then never analyze their financials. You put the time or money in, utilize the information to help both you and your business succeed.
  • As part of our bookkeeping services we include a video with our client’s financials to walk them through what is going on and help them better understand.

Mistake # 2

Incorrect categorizing or over categorizing transactions.

  • Rushing through and coding transactions to the incorrect account. Example: you might have a rent payment in consulting expense.
  • Be sure you are paying attention and putting transactions in a category that makes sense.
  • Having too many categories can also be confusing and cause a mess. Example: client comes to us with the following expense items: Travel Meals, Travel Hotel, Travel Cab, Travel Air, etc. As you can imagine this is often times more detailed than necessary. Don’t get me wrong, it may make sense for some business but for the majority of small businesses, a simple travel category with all those items combined would be fine.
  • Having too many categories creates unnecessarily long financial statements, often times unreadable or not valuable. For example, seeing $45 for the year in “Travel – Cab” does not provide much value but rather more clutter when it could be wrapped into Travel.

Mistake # 3

Failing to keep receipts for purchases.

  • How many times have you looked at your bank statement and saw a charge wondering what it was for? Having a receipt will make that easy for you.
  • Not only does it help with coding your transactions but it backs up your expenses in the event of an audit.
  • On each receipt write on it: who, what, where, when why, and how much. The more the better should you have questions about it down the road or need to prove business purpose to the IRS.

Mistake # 4

Recording personal items or payments to the owner as business expenses.

  • Have a separate bank account (and credit card, if necessary) that is specific to your business. Run only business expenses through this.
  • If you accidentally pay for something personal on the business account, record it as an owners draw.
  • If you accidentally pay for something business related on your personal account, reimburse yourself from the business with a recording of what it is for.
  • Non-payroll payments to you as the owner generally should be recorded as owner draws (NOT expenses).
  • If you are setup as pass through entity, personal tax payments or estimates you make from the business account are NOT expenses, instead owner draws.

Mistake # 5

Incorrectly recording major purchases and potential corresponding loans with those purchases.

  • If you purchase a major item for your business (Ex: vehicle, machinery, office equipment, usually anything asset over $2,500) these should be recorded on the balance sheet, NOT in an expense account.
  • You take the expense for it through depreciation.
  • If you have any type of loan, that should be recorded as a liability on your balance sheet (NOT income) with principal payments against the loan going to the liability and the interest portion being an expense.
  • Often times we see clients booking auto loans to an automobile expense account. This is a red flag to us. If the vehicle is owned the proper treatment would be to add an asset for the value of the vehicle with a liability for the corresponding loan amount. The payments would be applied to the loan and the expense would come through depreciation of the vehicle.

Mistake #6

Not recording payroll correctly.

  • Payroll is more than just a take-home check. There is taxes, benefits, etc.
  • Ensure that your payroll is being recorded so that it matches your payroll report from your payroll provider. If you use someone like Gusto for payroll, they integrate with most accounting software to help you with this process.
  • At year-end your payroll report should match exactly to your books with the breakdown of Wages and Salaries, Payroll Tax Expenses, Benefits, etc.

Mistake # 7

Being unfamiliar or inexperienced with the entire process.

That is it, we have made it to the end of our “All About Bookkeeping” series. As a final wrap up we are doing a panel discuss with members of our bookkeeping team on our Podcast which we will post to the blog as well once we are done.

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

What is a Pass Through Entity?

Pass Through Entity - What is it and what does it mean?

Most businesses do not have to pay income taxes on the corporate level. Instead the profits from their business flows through (or passes through) to the owners of the company where it is eventually taxed.

Types of Pass Through Businesses

  • Sole Proprietor
  • Partnership
  • Single Member LLC
  • S Corporation

An example of a non pass through entity would be a C Corporation. In a C Corporation the company pays taxes on the profit of the business at the corporate level.

Basic Concept: If you have a pass through entity you have income and expenses related to the business that are reported on the business tax return (Schedule C, 1065, 1120S). The profit from those businesses are then reported on a personal return where the taxes are paid.

Here is the tax treatment for the various entity types:

Sole Proprietorship or Single Member LLC

File business information on a Schedule C on a personal tax return (Form 1040).

Partnership or Multi Member LLC

File business information on Form 1065 and then each partner will receive a K1 with their share of activity which will be used to report and pay taxes on the business activity on a personal tax return (Form 1040).

S Corporation

File business information on Form 1120S and then each owner will receive a K1 with their share of activity which will be used to report and pay taxes on the business activity on a personal tax return (Form 1040).

C Corporation (Not Pass Through Entity)

File business information on Form 1120 and then pay taxes at the corporate level.

Now you know what a pass-through entity is. Majority of small business owners in the US operate using a pass-through entity.

Check out our episode on the Small Business Tax Savings Podcast for more on this topic!

JETRO Goes Gusto Gold

JETRO Goes Gusto Gold

When JETRO started way back in 2013 we were looking for a modern, cloud based solution for the payroll side of our business.

We spent time researching and testing all the various options out there and just could not find a good fit that matched our model: modern, robust, and simple to use.

Luckily in 2014 we got introduced to Gusto and have not looked back since. Based on our research and experience, it is by far our preferred choice for payroll. Whether we are doing the payroll on behalf of clients or clients are handling it themselves we know they are in good hands when using Gusto.

As part of this journey we are proud to announce that we are now a Gusto Gold Partner!

Thank you Gusto for continuing to innovate and provide such an easy to use payroll solution for both JETRO and our incredible clients.

Want to learn more about Gusto? Reach out to us!

How should I structure my business with multiple owners?

How should I structure my business with multiple owners?

We often times get business owners that reach out to us that have multiple owners in their company, wondering what the best way is to structure their business.

In this specific article we are assuming an S Corp structure is desired prior to it reaching the owners personal tax return. If you don’t know what an S Corp is, we will dig into that in future post but in a nut shell it is a tax strategy to help limit the amount paid in self employment taxes.

With that assumption there are two main options we typically suggest. Note that this also assumes that all owners are going to be active within the business (not just silent investors).

Option 1

Setup company as an S Corporation with each owner as a shareholder in the business personally.

  • Advantages
    • One company, one tax return, one payroll account
    • Easier to setup and less maintenance
    • Cheaper
  • Disadvantages
    • Various owners cannot take advantage of tax strategies that help them but not other owners.
    • If you have multiple businesses you may need multiple S Corps.
    • Less Flexibility

Option 2

Parent company is a partnership with each owner having their own S Corp that owns their percentage in the partnership.

  • Advantages
    • Each partner can utilize tax strategies as they see fit (hire kids, business automobile, etc).
    • If they own multiple businesses their personal S Corp can hold the ownership in those and all business income will flow through their S Corp prior to reaching them.
  • Disadvantages
    • Multiple companies, multiple tax returns, multiple payroll accounts
    • More to setup and maintain
    • More expensive

 

With that being said, lets run through some scenarios.

Scenario 1: Two owners and one wants a Mercedes for his business vehicle and the other wants a Prius. In option 1, there could be some conflict because the price for these are vastly different and the person with a Prius does not get as much out of the tax strategy. However in option 2, it doesn’t matter because they can hold the vehicle ownership in their personal S Corp and do whatever they want with affecting the other owner.

Scenario 2: Two owners in which they are 100% active in the business with no other ventures. In option 2 they would have to pay for a tax return for the partnership and then two S Corps. They would also have to run two separate payrolls for each S Corp. Rather if they chose option 1 it would be one business return and one payroll which means it is more cost effective.

Generally if the owners have multiple businesses they participate in, we will suggest option 2 since they will want all income to pass through an S Corp anyways so they can avoid a portion of self employment taxes.

If the owners are on the same page as far as spending and tax strategies, we typically say option 1 is fine for them to help minimize costs and maintenance.

Either way, there is no one size fits all for every situation so be sure to discuss with a tax professional to ensure you get things right from the beginning.

Check out our episode on the Small Business Tax Savings Podcast for more on this topic!

Company Retreats – Connect w/ Your Employees or Clients

On June 29th and 30th here at JETRO we held our annual team retreat. Typically we get our staff together in a city for a few days to hang out but due to COVID we were limited to a virtual retreat this year. Given the circumstances our staff made the best of it and we had a great time and covered a lot of ground.

Retreats are important not only for us but for you in your business. Here is why we hold an annual retreat:

  • Get to know each other on a more personal level
  • Be transparent and update your team on the company vision and what the future looks like
  • Make important decisions and involve everyone
  • Show appreciation and how much the team means to you and your company

Whether you bring everyone together or hold a virtual team retreat I encourage to make it happen as you will see it truly unites your team.

On the Small Business Tax Savings Podcast below we share more information on this!

JETRO Goes Xero Gold

JETRO Xero Gold

When JETRO started way back in 2013 we were on the the forefront of virtual accounting. As part of that, we needed to find a cloud accounting solution that we could utilize not only internally but across our client base. We needed something that we could access via the cloud anywhere, anytime. After a lot of research and trial we landed on Xero, who at the time was fairly fresh in the US market.

Since then we have not looked back and continue to introduce Xero to thriving clients across the country. As part of that journey we are proud to announce that we are now a Xero Gold Partner!

Thank you Xero for continuing to innovate and provide such a “beautiful accounting software” to both JETRO and our incredible clients.

Want to learn more about Xero? Reach out to us!

Paycheck Protection Program (PPP) Forgiveness Cheat Sheet

Coronavirus (COVID-19) - Paycheck Protection Program (PPP) Forgiveness for Small Businesses

LAST UPDATED: 6/22/20

As you know, things are constantly changing with the Paycheck Protection Program. Our goal is to create an outline here of the things you need to know about when it comes to forgiveness.

Bookkeeping is the back bone to every business. With that being said, bookkeeping can quickly become an incredibly hard task unless you follow these four simple rules.

Facts

  • Time to Use Funds: 24 Weeks or December 31st (Whichever comes first) — You have an option to use 8 weeks if you received funding prior to June 5th
  • Required Amount Used on Payroll: 60%
  • Amount NOT Forgiven Loan Term: 5 Year Term at 1% (accruing immediately) with 6-month payment deferral from the date of loan disbursement

Costs Eligible for Forgiveness

  1. Payroll Costs (Must be at least 60%):  Paid or incurred during the covered period including: Salaries, wages,  employee health insurance contributions by employer, employee retirement plan contributions by employer, and state and local payroll taxes. NOTE: Capped at $100k Annualized per Employee and employer share of FICA is not included in the costs.
  2. Self Employed/Owner Payroll Max: $15,385 (8 Week Period) or $20,833 (24 Week Period) – They are also capped by the amount of their 2019 employee salary and retirement contributions. NOTE: Owner health insurance is no longer figured into the eligible costs for forgiveness. Non-owner health insurance still is.
  3. Max 40% of: Mortgage interest, Utilities, Rent

Employee Headcount or Pay Reduction

Your forgiveness amount may be reduced if:

  1. You reduce employee pay in excess of 25% (Salary or Hourly)
  2. You reduce employee headcount or Full-Time Equivalent (FTE). There are two methods to calculate FTE:
    • Long Method: Average hours each employee paid per week, divided by 40 and rounded to nearest 10th with a maximum of 1.
    • Simple Method: 40+ Hours = 1 FTE and <40 Hours = .5 FTE
    • Example 3 employees working 25, 35 and 42 hours per week. Using the long method your FTE would be 2.5 and using the simple method it would be 2.
  3. If you restore to original numbers by December 31st or end of the covered period (date you file your application) you are fine.
  4. Exceptions:
    • Inability to rehire individuals or similarily qualified individuals (or employee denies offer to come back at original level)
    • Able to document inability to return to the same level of business activity as business was operating at before 2/15 due to COVID restrictions.

Loan Forgiveness Process

  1. Complete and Submit Forgiveness Application to Bank (SBA Form 3508 or 3508EZ) within 10 months after the last day of the covered period. NOTE: A borrower may submit a loan forgiveness application before the end of the covered period if the borrower has used all of the loan proceeds for which they are requesting forgiveness.
  2. Lender has 60 days from receipt of application to issue a decision to SBA.
  3. SBA will deduct EIDL advance amounts from the forgiveness amount.

Check out our episode on the Small Business Tax Savings Podcast regarding this topic!

What Bookkeeping Rules Do I Need to Follow?

Top 4 Bookkeeping Rules to Follow

Bookkeeping is the back bone to every business. With that being said, bookkeeping can quickly become an incredibly hard task unless you follow these four simple rules.

1. Separate Business Bank Account

Have a separate bank account (and credit card, if applicable) specifically for your business. This is important even for you sole proprietors. Regardless of your business setup, this is vital.

If you are unable to get a credit card under your business name, make sure you dedicate one personal card strictly for business use only and use the payments to it as a reimbursement.

2. No Commingling

No personal expenses on the business bank or credit card account. In the rare occasion that you accidentally put a personal expense on the business account, record it as an owners draw or reimburse the business for it.

3. Keep Your Receipts

Store them in a file in your office or take a picture of them and save them in the cloud. This is vitally important in the event of an audit.

On each receipt write on it: who, what, where, when, why, and how much. Not only does this help backup the business purpose but it also reminds you in case you forget down the road.

4. Ditch the Cash

Cash is hard to track and prove. In the rare event cash is your only payment option, be sure to get a receipt so you can properly document the business expense.

Check out our episode on the Small Business Tax Savings Podcast regarding this topic!

JETRO Giving Back to the Community

Giving Back to the Community

Here are JETRO we take seriously the act of helping others and the community. Every year we make a donation to various charities and initiatives based on the amount of tax returns we file. This year we also included an additional amount for each Small Business Tax Savings Podcast review we received.

As a client of ours and reviewer of our Podcast you play a role in this donation. The amount we contribute is directly related to you partnering with us.

I just want to say, THANK YOU! Thank you for working with us and listening to our Podcast so we can make a donation on your behalf.

This year we are proud to announce our support for the following charities and initiatives:

1. Mobilize MKE

COVID-19 has caused a 35-50% spike in the number of people needing the services of food banks in Metro Milwaukee. This pandemic has also forced the cancellation of many food drives, multiplying the food crisis our neighbors are facing right now. These food pantries tell us they anticipate seeing even greater need in May. Donations made will service local food pantries.

Learn More Here

2. American Foundation for Suicide Prevention

A gift to the American Foundation for Suicide Prevention helps fund their mission to save lives and give hope to those affected by suicide. Each dollar brings us closer to a world without suicide.

Learn More Here

 

3. Make-A-Wish

The mission of the Make-A-Wish Foundation is to create life-changing wishes for children with critical illnesses. The children they serve are fighting for their lives, and their families are doing everything that they can to help them in their battles.

Learn More Here

 

4. National Multiple Sclerosis Society

Multiple sclerosis (MS) is an unpredictable disease of the central nervous system that disrupts the flow of information within the brain, and between the brain and body. The Society’s mission is: People affected by MS can live their best lives as we stop MS in its tracks, restore what has been lost and end MS forever.

Learn More Here

 

Again, we are able to make these donations on your behalf due to your partnership with us. We thank you for that and look to continue to help the communities around us and those that are less fortunate.

Coronavirus (COVID-19) – Accounting and Tax Outlook

*Continuously Updated As More Information Becomes Available*

Welcome to our JETRO Coronavirus (COVID-19) Tax and Accounting Resource Center. Much of this information is rapidly changing. We will be updating information as it becomes available to us. Below are the headlines on various topics listed below. Each topic has buttons on the bottom to link to available resources.

The link directly below is the most comprehensive overview of all relief options to check out, provided by Gusto!

  • General Information
  • Government Loan Information
  • Business Relief Information
  • Personal Relief Information

General Information

Tax Deadlines/Extensions and Student Loan Payments by Employer

  • New Tax Return and Payment Deadline: July 15th (Individuals, Trusts, C Corps) – If you want to extend your return to October 15th that formal extension is also now due by July 15th.
  • 2020 Q1 and Q2 Estimated Tax Payments Due: July 15th (Previously April and June 15th)
  • Employers are allowed to contribute up to $5,250 tax-free annually to assist their employees with student loan payments. This covers payments up until December 31, 2020.

NOTES FROM 3/18/20 PODCAST:

These next few weeks (or months?) for business owners and individuals alike will be tough. However, as business owners this poses an opportunity for leadership.

I touch on this specific topic in this weeks Small Business Tax Savings Podcast episode which I have provided before.  Here is a brief summary:

1. Be A Leader

To your employees, clients, and community.

 

2. Embrace the Situation

Think of ways you can modify your business to maintain during this tough time. Do not just stick your head in the sand and give up. INNOVATE! 

 

3. Do Planning

Plan for the various situations (good, bad, ugly) and determine what your business will do if you hit those certain benchmarks. 

As we are navigating these unexpected waters together, let us know how we can help. We are that partner on your team to get through this together!

NOTES FROM 3/25/20 PODCAST:

1. Do Planning

Put together a plan on how your business will react at certain thresholds. Do a Good (3 weeks), Bad (2 months), Ugly (3-4+ months) plan so you know ahead of time what actions your business needs to take depending on how long this lasts.

 

2. Expense Cutting

Go down your income statement and see what items you can cut or downgrade. If you have any software fees is there any you can move down a package (Premium to Standard) temporarily. Start implementing these cuts today to maintain cash.

 

3. Slow Down Cash Outflow

Do you have any bills or rent payments that you can negotiate for short period of time? Reach out to loan providers and see if you can move to interest only payments temporarily. If they say no today, try again in a couple days.

 

4. Funding

Look into an SBA loan if you need cash now. Look into zero interest credit cards to see if those may be an option for you.

Government Loan Information

Paycheck Protection Program (PPP) Updates

The House, Senate and President signed the PPP update bill into law. Here are the changes:

🔸Amount of loan needed to be spent on payroll moves from 75% to 60%

🔸Amount of time to spend the funds moved from 8 weeks to 24 weeks (or end of 2020)

🔸Pushes back June 30th deadline to rehire workers to December 31st

🔸Repayment term of unforgiven amount moves from 2 years to 5 years

A few more updates we talk about in this weeks Small Business Tax Savings Podcast:

🆓 Free Tool for Forgiveness Application: https://lnkd.in/shrtslug

💰Funding is still available if you have not already received PPP funds

PPP Loan Certification Clarification, Taxability and Forgiveness Application

  1. PPP Certification Clarification: Originally when applying you certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”. The SBA and Department of Treasury have determined that there will be a safe harbor regarding that certification.

    The safe harbor is: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

  2. PPP Loan Taxability: Per IRS guidance, the PPP loan amount forgiven itself is not taxable however the corresponding expenses you used the forgiven funds for, you cannot claim as tax deductions.
  3. Forgiveness Application: This has finally been released while still some questions remain but here are some things we do know:

    -Time Period: You can choose between 8 weeks from the day the loan hit your account or 8 weeks that begins on your first payroll date following the disbursement.

    -Payroll Reduction Exemption: There has been new guidance that your forgiveness amount will not be reduced (as it relates to employee retention) if you have reductions related to: Individuals you have made a written offer to rehire but the employee declined, employees whose employment was terminated for cause, or employees who voluntarily resigned.

    -Owner’s Cap: The forgiveness amounts paid to owners eligible for forgiveness is capped at the lower of $15,385 (which is the $100k annualized) or the 8 week equivalent of the owners compensation in 2019, again whichever is lower.

PPP Forgiveness Information

PERIOD: 8 Weeks (Starting the date of first disbursement of PPP funds)

WHAT IS FORGIVABLE?

  • Payroll Costs (Capped at $100k of annualized basis per employee) including: gross wages, health care benefits, retirement benefits, state and local taxes but NOT employer portion of FICA or FUTA
  • Interest on Mortgages Signed Before 2/15/20
  • Interest on Debt Incurred Before 2/15/20
  • Rent for Lease Agreements Signed Before 2/15/20
  • Utility Payments

NOTES

  • Payroll costs must make up 75% of forgiven amount (Ex: $100k PPP Loan, at least $75k payroll)
  • Forgiveness amount proportionately reduced by decease in head count or employee wages unless employer reverses that prior to June 30, 2020
  • Keep documentation of expenses (payroll reports, tax filings, receipts, etc) to backup the items for proof of forgiveness

Also important to note that things are ever changing so this is what we know now but we expect more details to come from the government regarding the topic of forgiveness.

4/27/20 Update: The Government has approved more funding to the PPP and will begin taking applications again 4/27/20.

4/16/20 Update: The PPP loan has reached its funding capacity. News is that Congress is working on allocating more funding to this program.

NOTE: UPDATE TO PPP PROGRAM AFTER RECORDING

-Interest Rate: 1% – Updated as of 3/31/20
-Term: 2 Years – Updated as of 3/31/20

Business Relief Information

Employee Retention Tax Credit (ERTC)

We’ve talked heavily about EIDL and PPP but what about ERTC? Don’t you love all the acronyms?

In order to be eligible for the ERTC you need to prove that you either:

1) Suspended operations fully or partially due to a COVID-19 shutdown order OR
2) Show a 50% or grater decline in revenue as compared to the same quarter of the prior year.

If you are eligible you can get a ERTC which is a refundable payroll tax credit of 50% up to $10,000 of wages per employee which essentially is a max of $5,000 per employee.

The ERTC cannot be combined with the PPP.

Example: Eligible employer pays 6 employees $10,000 each in the eligible period for Q2. The ERTC available to the employer would be $5,000 per employee or $30,000.

Personal Relief Information