I had to take a deep breath before writing this post. It can be the kind of self-serving nonsense that’s out there clogging up the internet. And let’s face it, as a CPA firm, we’re far from unbiased in this conversation.
But there’s one really compelling reason to share this content with you, and it’s enough to make me swallow all the cringe and type this post because we see it time and time again. Dozens of times a year, even. And that is…
It’s time to dive in and figure it out! Without further ado, here are the top mistakes we see from people who are handling the books and taxes themselves (or not getting the help they really need).
SPENDING TWICE AS LONG
Could you do this yourself? Or ask your cousin that took an accounting class in business school? Sure. But as the owner of a business, the most finite resource you have is your time. So why take up twice as much of your own time as it would take a professional to do it–costing you both in your own lost time but also a slower path to getting results.
If you hope someday to grow your business to $1 million in revenue, you need to be generating ($1,000,000/2000) = $500 with every working hour. So spending $100-200/wk on having your books done professionally isn’t that outrageous if it frees you up to focus on higher dollar activities.
Cost to you: $1000-2000 per month in the lost opportunity of your time
LETTING THE TRANSACTIONS PILE UP
Want to know the quickest path to an unhealthy relationship with your books? Let the transactions keep piling up waiting for you to get around to coding them. You’re constantly looking at it, and feeling guilty for not staying on top of it, but it’s also becoming a bigger and bigger nightmare to deal with. Having outside help ensures that your books are kept up more regularly, which helps you keep a good feeling about your numbers, AND gets you the results much faster.
Cost to you: developing deep anxiety around your books
MESSY BALANCE SHEETS (aka negative account balances everywhere!)
Some folks who we take over for were savvy enough to keep the transactions coded and even have a decent-looking income statement. But when we open up the balance sheet, BAM! It’s a minefield of negative accounts, bank accounts that don’t exist, and “holding tanks” that were never cleared out or dealt with. Unraveling this kind of mess takes hours of bookkeeper time just to get us ready to take you on as a client, and even worse–it meant you were probably looking at inaccurate reporting this whole time.
Cost to you: $625-1125 in clean up costs
If there’s no “squaring up” against the bank and credit card statements out there, then your books could be full of transactions that didn’t exist. Or just as easily missing transactions that actually took place. Reconciling the accounts is the only way to ensure that your balances match reality. And anything short of that means the reports you’re looking at (or even worse filing your taxes based on) are just plain wrong. Reconciling against third-party statements is a part of any accountant’s month-end process and will save you from using inaccurate data where it matters most.
Cost to you: $500-1000 in clean up costs
Loan payments aren’t ALL applied against the principal amount of your debt… some of it is interest expense. The large deposit you got for that annual subscription to your service needs to be booked to an unearned revenue account and recognized monthly instead. The deposits hitting your bank account net of fees aren’t actually your sales amounts. You need to be recording total revenues and showing the cost of your credit card processing fees. All these sorts of adjustments (and many others) are a part of accrual-based accounting. And we use accrual accounting with most of our clients because it most closely aligns in time the recognition of revenue and the related expenses it took to generate that revenue. Missing accruals and adjustments make your books, yet again, inaccurate and require additional clean-up.
Cost to you: $500-1000 in clean up costs
DEDUCTING ITEMS THAT AREN’T REALLY EXPENSES
Oh, and this is a big one. Dropping federal and state estimated tax payments for the owner into the “taxes” category as an expense. Deducting owner distributions as an expense on the income statement. Including fines and penalties in your deductible expenses. Sifting through these errors can take time to correct, for sure. But the biggest cost here is when these expenses get called into question for a client and they wind up having to amend their tax returns and remove the expenses. Having a properly trained and educated accountant running the numbers means errors like these don’t slip into the books and come back to haunt you.
Cost to you: $20,000 of misstated deductions that need to be amended and pulled out can easily lead to ($20k X (20% fed tax + 5% state tax + interest + penalties)) = $7,000 more paid out to the government
TOTALLY MADE UP WAYS OF DEALING WITH YOUR CREDIT CARDS
This is a crowd favorite, coming up with very unique ways of accounting for credit cards. We’ve seen it all over the years:
Credit card statements becoming expense reports.
Credit card payments from the checking account categorized as income and the expenses on the card booked as expenses.
Taking a fully deductible expense just for the total amount of the credit card payment on an expense line called “Credit cards.”
Or sometimes, not recording the credit card charges at all, and only reflecting the payments, leading to a massively overpaid AMEX account on your balance sheet (see Messy Balance Sheets above…).
And this isn’t about shaming–we get it, this can be a fairly odd concept to wrap one’s head around. But there IS a right way to track your credit card charges and balances that will ensure your reports stay accurate and meaningful.
Cost to you: $625-1125 in clean up costs
MIXING BUSINESS WITH PERSONAL
One of the first things we teach about when we do workshops or keynotes for early-stage entrepreneurs is the importance of separating your business and personal banking. It serves so many purposes including, but not limited to:
adding points to your claim that this is a business and not a hobby
helping solidify your corporate liability shield
helping you find 30% more deductions just by being very clear about which transactions were business-related and speeding up your time to categorize your spending by 30-50%.
But if your books are commingled, it’ll take some serious attention to separate out the personal from the business and the worst part is… that’s something nobody can do but you. We’re not going to know which Starbucks receipt was from a business meeting vs you just grabbing a cup on your way to see your family.
Cost to you: 2-3 hours per month sorting through, or 24-36 hours for a whole year
Tax Filing Misses
NOT PAYING ADEQUATE WAGES TO THE OWNER-OPERATORS OF YOUR S-CORP
This has to be one of the most common mistakes we see on a business return done by someone else. There’ll be an S-corp return where the owner had some profit for the year, paid themselves, and yet none of it went to them on a W2. This is definitely not OK and will come back to bite you. In case you’re curious why here are the relevant details from the IRS on reasonable compensation for an S-corp owner.
While it might seem clever initially, this way of skirting the Social Security and Medicare systems entirely was shut down long, long ago. And the “distributions” you paid yourself instead of wages will likely be recharacterized as wages, which will then come with additional payroll taxes, penalties, and interest. Working with a competent CPA on your tax prep should always involve conversations about reasonable compensation, and it should be revisited at least annually if not quarterly.
Cost to you: $100k in distributions that get recharacterized as wages would leave you holding a bill for $20-25k
NOT REPORTING ALL YOUR INCOME (e.g. sales of cryptocurrency, home sales, etc)
File too quickly and you might not catch that 1099 listing your cryptocurrency sales. Yes, the $20k of Bitcoin you turned back into cold hard cash will create a taxable transaction (potentially) and, unless you look forward to letters from the IRS, it has to be reported on your 1040.
Likewise, home sales also need to be reported even in cases where there isn’t taxable gain. Missing these sorts of issues often requires filing an amendment. The cost of preparing the amendment at Revel CPA is the same as if we prepared the return in the first place because we have to recreate everything about the return. If our name is going on the bottom line, we need to know where every number came from. So now you’re paying for the return to be prepared professionally anyway!
Cost to you: the time it took preparing it yourself the first time + the cost as if it was filed by a professional originally
NOT DEDUCTING THE COST OF THE INVESTMENTS YOU SOLD
When you sell an asset like a share of Gamestop stock, your home, your business computer, or some cryptocurrency, you create a potentially taxable transaction that the IRS is often informed about ahead of time by the people who gave you money. But the IRS is usually only informed of how much money you received in the sale (this is called your Proceeds). What they aren’t aware of (usually) is how much you paid for that asset (this is called your Basis). And to oversimplify things, you don’t pay tax on the Proceeds of a transaction, you pay based on the Realized Gain, which is RG = Proceeds – Basis. So accurately reflecting the basis has you paying the right amount of tax, saving you from overpaying when you don’t need to.
Cost to you: could easily be 5-30% of the proceeds of your sale
NOT UNDERSTANDING INDUSTRY-RELATED DEDUCTIONS
Since we work primarily with folks in creative industries, it’s very common for our clients to have perfectly legitimate business expenses that don’t apply to other business owners.
Can all business owners deduct the makeup they buy from Sephora? No. But could our makeup artist client? Possibly.
Could all business owners deduct the tickets they buy to concerts? No. But could our A&R client who is scouting out new acts? Possibly.
Whether it’s research, travel, or just an unusual direct cost, the heartbreaking tragedy is we’ve had hundreds of clients come to us over the years sharing stories about how another CPA didn’t let them write off X, because to them they couldn’t understand how that was deductible. Well, it takes some familiarity with the industry to know the “ordinary and necessary” costs that go into that kind of business. So please don’t be told you can’t write off something that’s an honest cost of you doing business!
Cost to you: $10k of missed deductions could mean you’ve overpaid your taxes by $2500 or more
TAKING A SIMPLIFIED HOME OFFICE VS. THE LONG-FORM CALCULATION
Do we like simple things at Revel CPA? YES! Of course, we do. But we’ve also seen dozens of returns of the years where the client wound up missing thousands of dollars in deductions just because they took the simplified home office deduction rather than using their actual expenses. When the simple approach is better, we use it. But you want someone analyzing all possible approaches to a situation and making sure you’ve optimized for the maximum savings.
Cost to you: $500-1500 in overpaid taxes
DOUBLE-DEDUCTING MORTGAGE INTEREST AND PROPERTY TAXES FOR RENTALS
It wouldn’t be on the list if we didn’t see this more than once. And it’s a prime example of the challenge with a DIY software solution for taxes. They can ask you the questions, but if you don’t understand the questions–or if the system isn’t smart enough to pick up on when you’ve answered it incorrectly–you wind up with an incorrect tax return and that always costs you money.
In this case, we often see clients who have rental properties answering a questionnaire for Schedule A, Itemized Deductions, and being asked to list their mortgage interest. They’ll list the interest for their primary home but also list their rental property interest as well. Then when they’re answering questions about their rental property for Schedule E, they get asked again about mortgage interest and property tax, and we see the exact same numbers deducted a second time on that schedule. Obviously, that’s not gonna fly with the IRS.
Cost to you: these are big-ticket deductions, so double-counting $15k in mortgage interest and $9k in property taxes means when you amend your return to correct it, you’re paying another $6500-9500 in taxes, penalties, and interest
INACCURATE FILING STATUS
Still legally married but not living with your spouse? You could be separated for years, but if you’re still married on paper, the “Single” filing status is off-limits for you. Married-filing-separately status applies most accurately in that case, and it has a cost in some circumstances because the single status offers higher limits on some deductions and credits than married-filing-separately would. And if you are single, but have a dependent, Head of Household status might apply to you and provide additional deductions. An expert can help you navigate the various filing statuses and make sure you’re choosing one that will be accurate and save you the most money.
Cost to you: choosing a status you’re not eligible for or choosing one that doesn’t give you the deductions you’re entitled to could easily cost you $2500-5k
NOT OPTIMIZING DEPRECIATION FOR BUSINESS ASSETS OR RENTAL PROPERTIES
We often see clients not accurately depreciating their business assets or rental property assets, and it’s not surprising! Depreciation is an easy enough concept in a big-picture sense. But it’s tricky when you get into the details.
Leasehold improvements vs furnishings.
To accelerate or not to accelerate.
Splitting properties into buildings and land, part of which is depreciable and part isn’t.
And often, we see clients forgetting to depreciate assets at all, which has them missing out on thousands of dollars in immediate tax deductions.
Cost to you: $15k in missing depreciation could mean you’re overpaying your taxes $3-5k
LACK OF PLANNING / ESTIMATED TAXES
For our core business clients that opt for tax planning services, we meet with them quarterly to make sure that while the numbers of the business are constantly in flux, we’re adjusting our plan to have the right amount of taxes contributed during the year so they aren’t left holding a big bill. But whether you use our quarterly tax planning process, or just pay in your estimated taxes based on your payment vouchers, the important thing is to be paying-as-you-go and not letting the bill pile up all year. Use your business’ cash flow to your advantage and time out your tax payments throughout the year so you can avoid having to cut a big check in March or April. It’ll give you more peace of mind and help preserve a healthy relationship to tax filing.
Cost to you: sticker shock and a whole lot of anxiety around tax time
Professional accounting help isn’t for everyone. We tell folks all the time who come to Revel CPA for help, but only have some W2s and a student loan–there’s nothing we can do for you that you can’t do for yourself!
BUT, if you own a business, are self-employed, have rental properties, have significant investment activity… you have crossed the threshold into getting immense value from the process of having a professional prepare your taxes.
And whether you call on us or not, please watch out for these common mistakes when filing your own taxes or doing your own books. If we can prevent one business owner from making one of these costly errors, then this will have been well worth it!