The Tax Questions 50% of Small Business Owners Ask Their CPAs
If I had a penny for every time a small business client asked me one of the questions below, well, I might not be a CPA anymore.
It doesn’t matter if they run a three-person juice bar in Georgia or a 40-person law firm in California—many owners bring up the exact same things.
These are the top four questions I get from my clients—and how I answer them every single time.
1. “Can I run personal expenses through my company?”
- # of small businesses that ask: Over half
The short answer? Yes, you can. But you should keep a few things in mind.
I’ve seen people use their company credit cards to cover their vet bills, vape pens, spa days—basically, you name it. And sure, you can technically do that. However, you can’t write all of those expenses off from a tax perspective, because they aren’t qualified business expenses.
A qualified business expense is anything that is ordinary and necessary to you running your business—like your phone or laptop, for example. Browse through this list of business tax deductions to see if your expense is common enough to be listed.
Another thing to keep in mind? You might have a hard time explaining to your investors and partners why you’re using your team’s hard-earned money to pay for things like dog grooming.
Now, things are a little different when you’re a sole proprietor. If you’re the only owner, other partners may not glare at you if you run personal expenses through your business. The thing is, it can be difficult to keep track of your business finances when everything is muddled together.
My advice is to keep your business and personal expenses in completely separate courts.
2. “Why doesn’t my bank account balance match my income statement?”
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- # of small businesses that ask: One in three
A lot of folks get confused when they look at their income statement and it doesn’t match their balance sheet. That’s because it shouldn’t.
Your net income is a statement of activity, not a statement of position. Here’s a breakdown of the difference:
- Income statement: This is a summary of spending activity that covers a specific time frame. On this sheet, you’ll see how much you made in revenue, or that expenses rose because you hired more people.
- Balance sheet: On the flip side, a balance sheet covers your current position. It shows you a snapshot of where your business is at a certain point in time. In other words, if you had to liquidate your business today, this is what you would have left in cash.
3. “Do I need to keep every single business receipt?”
- # of small businesses that ask: One in five
That crumpled-up pile of receipts you have stashed in a drawer somewhere is not that helpful. In many cases, a bank or credit card statement is all the documentation you’ll need to share with your accountant.
But keep in mind that accurate recordkeeping is an important way to back up the entries you make on your books and tax returns. You may have supporting documents such as sales slips, invoices, or canceled checks, or an employee expense policy that tells people they need to keep receipts to validate their expenses. Here are a few more recordkeeping best practices from the IRS.
To make recordkeeping easier, trash your paper receipts and use a service like Expensify or Receipt Bank, which is already included when you sign up for Xero. Plus, Xero has a mobile app that captures expenses to make things even easier.
4. “Should I go out and buy something just to get a tax deduction?”
- # of small businesses that ask: One in six
In most cases, no. It’s still cash you’re pulling out of your business to spend on something. The golden rule: If you don’t need it, don’t spend it.
Allow me to explain. Credits and deductions aren’t the same animal. Tax credits lower your taxes, while deductions just lower your taxable income.
- Deductions: If you’re in the 24-percent tax bracket, a $100 deduction would save you $24 on taxes.
- Tax credits: A $100 tax credit would mean you simply spend $100 less on your taxes.
Let’s say you’re taking a vacation, but you also decide to stop at one of your suppliers on the way. Because you were already committed to traveling, you can write off parts of the trip you spend on business with your supplier.
However, if you don’t have a reason to take a trip or buy something, don’t solely do it for the tax benefits. It will still end up costing you more.
So you already know the questions your CPA probably gets asked ad nauseam. Now think up some follow-ups that will give your accountant a real run for their money.