Why is bookkeeping so important?
You don’t need a pesky accountant doing your bookkeeping, right? Nah, your business is simple… Quickbooks is just a few clicks each month, it takes 10 minutes!
Heard, Chef.
From a CPA, here’s the deal
Not every business needs bookkeeping. But if you own an S corporation or multi-member LLC, you absolutely do. And not having professional bookkeeping can be a very expensive mistake.
Reason 1: Avoiding double taxation
Let’s say you run ABC consulting, an S corporation in NYC that did almost $2M in revenue, leaving $800k in profit.
At the end of the year you decide to give yourself a “bonus” and distribute $500k of that profit. High five, you deserve that! 🙌
But that $500k is not an expense (it’s a distribution), so you still pay taxes on $800k of income.
Here’s where people run into trouble.
You’ve now paid tax on $800k, but only took $500k out. You now have $300k worth of “basis” in your company.
Basis is the magic number that tracks how much of your profit you’ve already paid tax on (among other things). And basis determines how much tax-free money you can take out of your business.
But basis isn’t an income or an expense. It’s tracked on the balance sheet, through specific equity accounts depending on your business structure.
It changes frequently through your normal course of business, and many business owners we talk to are tracking basis improperly, or not at all.
Okay, but what’s the big deal?
When you take money out of your business, but don’t have enough basis, you can wind up paying tax twice on the same income.
Yes, ouch.
Reason 2: Bookkeeping provides business clarity
If the only financial insight you know about your business is how much money is in the bank, you’re missing out.
Here’s a few examples of what bookeeping can tell you:
What does it cost you for every $1 you earn? Where are you spending it?
How is your business doing this year vs last year? Are you becoming more profitable or less?
How much money (cash) did you put in or take out of the business this year?
Can you afford to hire that new person?
Bookkeeping enables you to make smarter business and financial decisions.
Reason 3: Quarterly Taxes
Every quarter business owners, partners, and freelancers need to submit estimated taxes to the IRS and states. The amount to pay depends on your business profit (income - expenses), so you need to be tracking your financials on at least a quarterly basis.
You can ignore or guess on your quarterly taxes (we have a few other tricks up our sleeve), but getting it wrong can result in underpayment penalties.
Reason 4: No more tax filing stress
When your accountant is maintaining your books, tax time is a breeze. All of your records are organized, all of your 1099s go out, and you’ll finally file on time.
Most importantly, no missed deductions.
What this CPA recommends
If you run an S corporation or multi-member LLC, we absolutely suggest investing in a good accountant (one that actually understands this stuff).
If you are a single member LLC bookkeeping is not necessary - you can wing it with spreadsheets/Quickbooks. But it’s still valuable and will save you time, money, and stress.
