Business owners today face a more complex tax code than ever before as well as increased scrutiny from the IRS, which has beefed up its staffing and resources for tax compliance. For these reasons and others, it is more helpful than ever to have the right accounting system in place to help business owners limit the risk of potential tax issues, understand the opportunities facing them and their business, and work in a more strategic way with their advisors.

In this article, Leelyn Smith’s tax professionals describe the importance of an accounting system for business owners and how to navigate the available options.

Benefits of accounting systems done right.

Taxes are certainly one issue—but not the only issue—that can be addressed through your accounting practices. If you are a business owner, the right accounting system can benefit you in the following ways:

• Help you avoid problems with the IRS: Separating business expenses from personal ones is one of the biggest tax-related challenges business owners face. It is critical to be thoughtful about how travel, meals, entertainment, gifts, and other expenses are categorized. A well-constructed accounting system can make this task much easier.  

• Better understand your business: The right accounting system can help you understand your business better by allowing you to look at various performance measures and compare earnings and expenses over specific time periods.

• Allow your accountant or tax advisor to be more strategic: By accomplishing many of your business’ basic bookkeeping and organizational tasks through your accounting system, you can free up your tax advisor or accountant to be more strategic in providing advice and guidance.

Four accounting systems to consider.

There are a few different ways to manage your accounting needs and interact with your tax/accounting professional. The right solution should be tailored to the size and type of your business as well as your personal preferences and budget needs. These methods include:

Conducting year-end review and reconciliation

Some business owners, especially those who have recently launched a startup or who operate their business as a “side gig,” may simply wait until the end of the year before handing over their payment and expense information, including credit card and bank statements, to their accountant.

The benefit of this approach is that it does not require the business owner to spend much time throughout the year on accounting issues. However, it is important to consider the drawbacks. First, a business owner may end up paying an accountant for tasks the owner could easily do herself, such as organizing payment and expense records and documentation. Also, this end-of-year method will limit a business owner’s opportunities for using internal reporting measures—such as benchmarks, key performance indicators, and monthly or quarterly variances in expenses—to manage their business more strategically.

Maintaining separate accounts throughout the year

Some business owners find it useful to completely segregate their business and personal accounts. So, for example, they may pay all their business expenses with a corporate credit card and all their personal expenses with a personal credit card. Although they don’t organize their payments and expenses throughout the year, they are at least able to show their accountant which activities are business-related and which are not. This, in turn, makes it easier for the accountant to reconcile their books.

Nonetheless, this type of accounting system suffers from some of the same issues as the year-end review method. Specifically, it doesn’t provide business owners with much insight throughout the year about how well they are controlling their expenses, meeting their sales goals, or tracking toward other benchmarks.

Employing formalized accounting software

Many business owners employ one of the formalized accounting packages available online. These tools provide owners with various capabilities, including monthly reconciliations of expenses and account balances as well as period-by-period performance indicators. Essentially, owners can take data from their expenses and income and turn it into the knowledge they need to evaluate their business’ progress.

Some of these accounting software packages allow business owners to share their information directly with their accountants and interact with them. This ability gives accountants a chance to be proactive and point out issues such as changes in spending patterns. Areas of opportunity may also become apparent. For example, if the accountant observes that the business owner’s income has dropped for a few months, the accountant might recommend that the owner lowers their quarterly tax payments to improve the business’ working capital.

Using industry-specific accounting software

Some business owners face accounting requirements that cannot be met by standard accounting software packages, either because the owners work in an industry that is subject to specialized IRS tax compliance regulations or due to the nature of the business itself.

One such example is the construction industry, in which companies’ revenue for individual projects may not correspond to the accounting period in which the costs for that project—for example, labor and materials—were incurred. To meet this accounting need, business owners may rely on accounting software that is designed specifically for the construction trade.

While these specialized packages may be more expensive than standard accounting software, they provide key organizational and accounting benefits to business owners and their accountants in specialized industries.

Addressing issues in real time.

At Leelyn Smith Tax, we can provide the greatest benefit to business owners by working with you throughout the year—not just at “tax time.” Our goal is to help you choose the right approach for your accounting practices so you can gain insights into your business and keep moving forward with confidence.

If you have questions about tax and accounting issues, please contact your Leelyn Smith Tax advisor.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

We suggest that you discuss your specific tax issues with a qualified tax advisor.