Avoid Common Bookkeeping Mistakes for a Smoother Tax Season

This is Daniel, the founder of Bookkeeping for Painters.

And this is Richard, the advising director with Bookkeeping for Painters.

You all right?

Yeah, I am. It's— it's— I'm just figuring out— start the podcast with a— with a good cough so they can't edit it out. Uh, no, just cold weather. Um, Upper Midwest, fourth grader, and my son's a fourth grader and he brings home all sorts of stuff from school, so just Just typical cold.

Wow. Yeah, fortunately we haven't experienced too much sickness, which I'm surprised cuz it, it might hit in January, February timeframe, but so far we haven't had too much sickness in the house yet. But I say that I should knock on some wood. But today we're gonna talk about how you can get your books ready for tax season. And this is probably on a lot of folks' minds, so figured to do a podcast on how you can get yourself ready. And as we're putting this podcast together, we just found out some pretty startling news that Bench, which is a bookkeeping accounting firm that's pretty big— they have 450 employees And I know a lot of painting businesses use Bench. They just put out a notice of service closure, uh, and it's posted on their website right now. And it says, I'm just going to read it. We regret to inform you that as of December 24th, the Bench platform will no longer be accessible. We know this news is abrupt and may cause disruption, so we're committed to helping Bench customers navigate through the transition. From the entire Bench team at Bench, it's been an absolute privilege to serve small businesses for 13 years. Thank you for being part of the journey. So I don't know exactly when this came out, but I think it's pretty abrupt because I did post it on social media and some of the folks that use Bench are just finding out from my Facebook post. So I think it has happened pretty recently. It's kind of crazy.

Yeah, and terrible timing too, because here we are at the end of the year. People are trying to close their books for the year and get ready for tax prep, and their accountants have kind of vaporized into thin air. And so I imagine a lot of people unfortunately are going to be left out to dry, not having an accounting service that can help them get themselves closed up for 2024 and get their taxes done for 2024.

Yeah, it's definitely, it's definitely pretty crazy. Well, um, so if you, if you use Bench, definitely reach out, uh, and, and try to get that handled as soon as possible. Hopefully you're not finding out from this podcast. Hope you found out already. But, um, so today I was hoping to kind of go through some items on what you should do to prepare for tax season. So we'll go through why being tax ready matters, some steps to prepare for tax season, some pitfalls to avoid, and some resources, uh, to increase your tax readiness. So first of all, why, why should we care about, uh, getting ready for tax season? It can definitely be in your interest to be ready for tax season because we're talking about your money, right? The IRS allows you to take deductions against your income, and as long as you can substantiate it, it will hold up and you'll be able to reduce your taxable income just, just by deducting, keeping proper records and deducting those expenses, those purchases you made in the course of business that are ordinary and necessary. Those will reduce your taxable income and save you thousands of dollars. So that's a, that's a pretty good reason to, to be tax ready.

That's why I've got my big shoebox that I put my receipts in throughout the year, and they're a little stained with like, like the hamburger grease from my fast food lunches. But I just take my whole shoebox and hand it to my CPA and that takes care of me, right?

Well, not really. Hopefully, uh, you're— no, now that can be a process. It's maybe more of an old-fashioned process that these days there's a lot better technology that you can use and, um, a more robust, a robust system. So I would say having something like QuickBooks Online, which would pull in your transactions from your bank accounts, your credit accounts, and getting those categorized. Maybe having a receipt management software like Dext or something where you're taking pictures of those receipts instead of just putting them in the shoebox. You can keep them in the shoebox, but it's not really great for organization where you can just digitize them and then they can be organized automatically. So there's a few more steps than just putting in the shoebox. But this, you know, gets you those deductions. It helps you protect yourself from an audit. So if, if and when the IRS does audit your business, you'll be prepared because you'll have books, you'll have those receipts saved. And this can be a huge relief on stress. So, and it might— some business owners have trouble really thinking, am I going to really get audited? It doesn't seem like it happens that often. And we can tell you, we work with a couple hundred painting businesses, you know, at any one time there's at least one painting business that's being audited, and either by the state or by the federal IRS, um, in some, some manner. Would you agree, like 1 to 2 at any point in time?

You know, it's funny you mention that, Daniel. I picked up my mail today and some of my clients I have a power of attorney filed on. And so I get copies of the notices that they receive from the IRS. And I actually received 5 envelopes from an IRS auditor today who is examining one of our clients. So a little serendipitous there. It's a unfortunate serendipity. Uh, but yes, um, especially now that the IRS has more budget than they used to. And, you know, we've heard those stories of like the IRS hiring 83,000 agents. That's overblown. But have they been hiring a good number of agents? Yes, they have. Has the current IRS Commissioner, uh, publicly stated that they're going to increase Audits? Yes, he has. We have seen that, that they are examining people more frequently. And I'm not saying this to scare anybody, because if you've got your books and your records and your receipts, you've got nothing to worry about. But if you've been a little bit lax in that area, and especially if your tax returns tend to throw up some red flags because you've got, you know, higher than average auto deductions or meal expenses or just those things that irritate the IRS algorithm, you would want to make sure that you really have your, your source documents and your proof because not everybody's getting audited, but we are definitely seeing an uptick in those who are.

Yeah. So plenty of reasons why you should be ready for taxes, maximize your tax savings, peace of mind for when an audit comes around, you'll be ready, and, and just having a good financial foundation for your business. All right, so what are some steps that we can prepare for tax season? So first of all, having your books— and when we say books, we really mean your bookkeeping, right?

Your—

some sort of system to capture the income and expenses Most folks these days are using QuickBooks Online. Hopefully you're not using Bench. If you're using Bench, you know, reach out to someone to switch over and get that handled. But, you know, QuickBooks Online is often the choice there. And so the whole process with this would be connecting your bank account, your credit accounts to QuickBooks Online. It will pull in those transactions, you know, those expenses, those deposits, money coming in from customers. Then you'll need to categorize each of those transactions and reconcile those transactions with your bank statements and your credit statements. And reconcile, all that means is just you're comparing what's in your books to what says— what it says on your bank statement or your credit statement from American Express or from Chase Bank. And you're making sure that they match up. So that's what it means to reconcile. So there's a reconciliation tool in QuickBooks Online that you would use to compare what's in QuickBooks Online with what the bank statement says or the credit statement says, and to check off those transactions to make sure everything is captured and everything is accurate and precise. So that's, that's kind of the, the big thing there is, is categorization of, of those transactions and then reconciling those transactions with your credit and bank statements. Then from there— yeah, go ahead.

Oh no, I was just going to mention the importance of reconciliation because sometimes it feels like, well, maybe we can just kind of skip this step, but it's super easy to miss a transaction or, you know, banks aren't perfect. Sometimes they lose things, sometimes stuff gets charged back. So comparing what the bank says to your books and records, making sure everything lines up, that's how you avoid those missed deductions and those annoying little balances that don't, that don't match and that like drive accountants crazy. That's how you avoid those.

Yeah, absolutely. So reconcile those accounts. Also going through, if you have employees or subcontractors, making sure that you've properly categorized those payments, especially for subcontractors, because we're coming up on the date, the due date for 1099s to be submitted, which is, uh, January 31st. And so when you have subcontractors, you have to submit a 1099 to the IRS and a copy to the subcontractor that you use, if you pay them over $600 throughout the year, uh, in, in their, um, not taxed as a corporation and you didn't pay them via credit card, which probably most subs are, you're paying them with Zelle or with a check or with something like that, you have to send them a 1099 to the IRS as well. So making sure that they're categorized properly in your books will help you generate those 1099s. So in QuickBooks Online, there's a little box you check to say track this as a 1099 subcontractor and/or 1099 contractor. And from there, QuickBooks Online, you can actually submit 1099s through QuickBooks Online. There's other tools you can use as well. If maybe you're paying your contractors through Gusto, for example, they'll actually do your 1099s for you. But just making sure that, you know, especially if you may have paid contractors through a different system, like maybe you paid through Gusto half of the year, but then the other half of the year you paid them with a check, we'll get to make sure that if Gusto is aware of those outside payments so that the 1099s are correct. So going through, making sure those subcontractor payments are properly recorded so that those 1099s can be generated accurately.

Yeah, and I might— you mentioned contractors, but also employees. If you have employees, making sure that their payroll is up to speed, that you're not missing any payrolls, because those W-2s are going to get issued and we want them to accurately reflect what the employees have been paid and how much taxes have been withheld. And when you're looking at employees, don't forget yourself if you are an S corp owner, especially if you're the only employee in your company. Make sure that you've run your own payroll for 2024. Maybe you're a new S corp and you did an election towards the end of the year. You've got about, you know, just a couple of days before the end of the year. Make sure you get that payroll in there so that you can show those wages on your tax return. We don't want to file an S corp tax return and not have any owner's compensation, or I should say shareholder compensation on there. That's one of those red flags that upsets the IRS computers.

Yeah. So to avoid that kind of brings us to our next section, which is kind of common pitfalls, pitfalls to avoid. So Common one that I see, especially for the, the smaller business, newer business owners who are just kind of getting started, they are oftentimes mixing personal and business finances together. Like they have a credit card that they're making personal purchases with and business purchases with, and this is not good from a bookkeeping perspective, but also just from a liability perspective. You want to keep your business and your personal separate. So having a separate credit card for business, separate credit card for personal, you know, a bank account that is solely for business transactions, you want to keep everything separate. One reason would be from just a liability perspective. I'm not a lawyer, but from my understanding, the lawyers say, you know, you want to have a, uh, you don't want the courts to be able to pierce the corporate veil. And so having everything separated, if your business is sued, you know, you can limit the liability of keeping yourself separate from the entity, the business that will hopefully, you know, build the case that if someone sues a business, they don't— the court won't also allow them to go after your personal assets. So having things separated can build that wall between yourself and your business to protect yourself. So that's the legal kind of reasoning. And then the, just from a bookkeeping or accounting perspective, keeping things separate just makes it easier to, to understand what's going on in the business for tracking purposes. So we know when you made a purchase at Walmart on your business card, you know, it was for business purpose as opposed to you're just wanted to buy some Halloween candy or something. So keeping that personal and business separate is paramount. Another— oh, go ahead.

Oh, I was going to say they have a, they have a term for that. I think they call it commingling when you mix your business and your personal together. And if you ever do get audited, you want to make sure that you don't have any personal expenses on there because those would get disallowed. And if it's severe enough, like if you're trying to write off a significant amount of personal expenses, you could face accuracy-related penalties. And that kicks things up quite a bit. I think that's 20% is the accuracy-related penalty. So just, you know, be careful that we're not double-dipping and that, you know, we're keeping our business away from our personal stuff.

So yeah, absolutely. Another common pitfall is, is just missing some common deductions, like not tracking your miles for your vehicle so you can get the mileage deduction or tracking a home office deduction and just knowing like some of the common things that you can do or not electing S corp. You mentioned earlier, you know, not properly running your officer salary. There's a lot of pitfalls, like just little things that if you kind of take advantage of those low-hanging fruit, those low-hanging fruit tax strategies and implement them before the end of the year, it can really help out with your, your tax bill and save you thousands of dollars.

Yeah. And if you have a corporation or a business taxed as a corporation, and you find that you do have a bunch of little tiny transactions that maybe you paid for with your own personal money or like a home office deduction or a personal vehicle that you're using for business, you're not out of luck. That's why we have Accountable Plans. We can get you reimbursed for those things and have the business still take that tax deduction. But we do need to track it. We need to know about it. So the end of the year is a great time to review that and make sure that you get reimbursed for those things so the business can write them off.

Yep. All right. Oh, go ahead.

Oh, I was going to mention, so we've got one more pitfall and I think this is actually my favorite, and that is the nobody likes last-minute bookkeeping. Nobody likes the shoebox full of receipts. It's stressful on you, the taxpayer, because you don't know what's in there and you have no idea what your taxes are going to be because you haven't tracked your expenses all year. And I can say from experience, it's stressful for your tax preparer and they're probably going to charge you more than you should have to pay because they have to do a bunch of, of, you know, bookkeeping and not just bookkeeping, but, you know, unfolding receipts. Uh, let you know a little industry secret, you know, pain in the butt charges are a thing for accountants. If you irritate them, if you make their life hard, there are some accountants who will charge you extra for that. Uh, I guess, you know, the, the appropriateness of that is debatable, but I get where they're coming from. So, um, not leaving these things to the last minute, having a system where you are dealing with it throughout the year so you can know your numbers, have a good idea of what your taxes are going to be, not be freaking out on April 12th because your shoebox hasn't been gone through yet. Uh, man, the, the, the peace of mind is, uh, I think it's worth its weight in gold. So, uh, of all the common pitfalls, I, I personally find that one to be, uh, the one I want to avoid the most.

Yes. Yeah, I just spoke with someone yesterday on this one, really frustrated. He's working with an accountant and nothing's done. It's end of the year and he's just scrambling to get everything together and stressed about, you know, not really getting that tax— understanding how much tax liability they're going to have, not understanding how well they did during the year. So it's best to, to, to be doing it throughout the year, not waiting till the last second for sure.

Right. I mean, the fourth quarter estimated payment is due on January 15th. You won't know if you're paying in enough if you don't know what your expenses are. And so you'll probably not make the payment or you'll make it too low and then you'll have underpayment penalty or estimated tax penalty to go along with that. And so, you know, when we think about bookkeeping, we kind of think of it as like, oh, that's an extra expense. Well, it is true there is some cost involved, but it's also saving you money because you're not paying unnecessary penalties or you're holding on to your cash longer because you're not overpaying the IRS. So it's not all expense. There is a financial benefit to it as well.

Yeah.

And think of all the money you'll save on Tylenol because you—

okay, exactly. All right. So last section here is the tools and resources for being ready for tax season. So we mentioned QuickBooks Online. It's, it's kind of the go-to for maintaining your books, creating those books. I don't necessarily recommend Unless you're pretty savvy with bookkeeping, like you've had some accounting classes and, or some familiarity with accounting, QuickBooks Online is not really a tool for everyone. Uh, it has gotten— they have some useful features now to make it more user-friendly, but it's really an accountant's tool or bookkeeper's tool to, to manage your, your books. So I do recommend getting a bookkeeper to manage QuickBooks Online for you. 'Cause it getting it done right the first time is, is always the best way to go about it. The next tool would be something like Dext or Hubdoc. These are receipt management softwares where you can download an app on your phone, take a picture of those receipts, especially paying attention to meals because meals are scrutinized more closely. So whenever you have a meal with a client or employee or a contractor, subcontractor, just get the receipt, write on the receipt the reason for the meal, like meeting to discuss project, take a picture of the receipt, and then that will go up into Dextor Hubdoc and store that digitally to have that justification, that, that proof of, of that meal so you can deduct it on your taxes. Meals are scrutinized. Travel, if you're like traveling to the Painter Contractor Association, which Richard and I will be at in February in, in Colorado Springs, if you're going, definitely find us. Um, if you're going to that, make sure you document that, get those receipts for that event. And also vehicle use, mileage, having a mileage log for your vehicle is super important. Getting something like MileIQ. Is a— it makes the record keeping for, for tracking miles a lot easier, uh, using something like MileIQ, which basically tracks the miles as you drive, and then you swipe left or right for business or personal, and it remembers your routes. Makes the record keeping for a mileage log a lot easier.

Yeah, and I know tracking miles is like the bane of everyone's existence, like I get asked all the time, like, is there any way I can avoid tracking miles? Unfortunately, the answer is usually no. If you get audited and they ask about your auto expenses, the first thing they're going to say is we want to see your mileage log. And if you don't have one, there goes the deduction. So yes, I know it sucks. I completely agree with you, Daniel. MileIQ makes it suck a little bit less. But I would say the value of those deductions are so great. The IRS just announced that in 2025 the amount will be $0.70 per mile. It's the highest it's ever been. It is worth the extra effort to keep the log and protect those deductions.

Yep. And The last one is, you know, really getting a good CPA or bookkeeper to help you with this time of the year and really throughout the year with your bookkeeping and your tax situation. A good bookkeeper, CPA, accountant should pay for themselves. Like, it should actually be a return on your investment. You should be making money by hiring a bookkeeper or CPA. They should be helping you save more money on taxes than what you, you've paid them, or helping you increase your bottom line net profit because of the recommendations that they've made to improve your business. So find one of those and hold on to them.

Yeah, and, and find one who doesn't go out of business on a moment's notice.

Yeah, that's always a plus, right? All right, well, hopefully that was helpful on giving you some guidance on how to prepare for tax season. If you have any thoughts for future episodes, definitely reach out to us on Facebook. If you go to Facebook, type in Grow Your Painting Business, join the conversation. Love to hear from you. And with that, we will see you next week.