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Improper accounting can bring your business to a halt in many circumstances when you need help the most, such as tax preparation, due diligence in business acquisition process, loan financing, third-party verifications, and more. Therefore, you need a great bookkeeper or accountant. A bookkeeper or accountant will help prepare your financial statements, which in turn… Continue reading Why Do I Need a Bookkeeper or Accountant?

Business account. One of the first things you should do when you start a business is open a business checking or savings account. You may also apply for a business credit card if possible. You should keep your business account separate from your personal account. Payments for business expenses. You should make all payments by… Continue reading Bookkeeping and Recordkeeping Tips for Business Owners

Before you reconcile your monthly bank or credit card statement, check your own figures. Begin with the balance shown in your books at the end of the previous month. Compare the deposits listed on the bank or credit card statement with the deposits shown in your accounting software. Note all differences in the dollar amounts.… Continue reading How To Perform Bank and Credit Card Reconciliation

The IRS allows a business expense deduction if the expense is both ordinary and necessary. An ordinary expense is defined as an expense that is “common and accepted” in your trade or business. A necessary expense is defined as an expense that is “helpful and appropriate” for your trade or business. Whether you are forming… Continue reading Common Business Expenses

Books and records that cannot be reconciled to the tax return Transactions that are not properly authorized Recorded transactions are not valid Existing transactions are not recorded Transactions are improperly valued Transactions are improperly classified Transaction are recorded at the improper time Transactions are incorrectly summarized Transactions all made by the same person or related… Continue reading Weak Internal Accounting Controls That Could Trigger an IRS Audit

Federal / state matching program When the federal / state matching program indicates a taxpayer has reported significantly less income on the federal return, the examiner can use the income reported on the state tax return to produce a federal tax examination report. It has been held that positions taken in a tax return signed… Continue reading Methods IRS Generally Use to Audit Your Returns

Entries that reduce taxable income For business returns, the IRS may review entries that reduces taxable income, such as a deferral or postponed recognition of income. A deferred income account (typically included in the liability section of the balance sheet), may indicate income from services performed or merchandise shipped and received by the customer. A… Continue reading Methods IRS Generally Use to Audit, Review or Analyzes Your Business Returns

The corporate and shareholder income tax returns are considered related because the returns are for entities over which the shareholder has control, and which can be manipulated to divert funds or camouflage transactions. Therefore, the examination of the corporation cannot be completed without also examining the shareholder’s individual return. For Example, A closely held corporation… Continue reading The Thin Line Between an Audit of A Closely Held Corporation, and That of the Related Individual Return

Sources of funds Sources of funds are the various ways the taxpayer acquires money during the year. Examples of sources of funds include: Decrease in cash-on-hand, in bank account balances (including personal and business checking and savings accounts), and decreases in accounts receivable, Increases in accounts payable, Increases in loan principals and credit card balances,… Continue reading How the IRS Determines Taxpayers’ Source and Application of Funds

1. Total bank deposits Less: 2. Nontaxable receipts deposited 3. Net deposits resulting from taxable receipts Add: 4. Business expenses paid by cash 5. Capital items paid by cash (personal and business) 6. Personal expenses paid by cash 7. Cash accumulated during the year from receipts Subtract: 8. Nontaxable cash used for lines 4-7. For… Continue reading Basic Formula Used by the IRS to Compute Understatement of Taxable Income