Do I really need to keep books for my new business?
Small business entrepreneurs juggle a lot each day. So much energy is expended setting up operations, finding clients, managing those new clients, marketing, networking, actually doing the work, etc.…what small business owner has time to keep up with the books?! Besides, if your business expenses are greater than your income in the first year, no taxes are due, right? So, does it even matter if you keep the books at the beginning?
Yes, its does. Frankly, bookkeeping and recordkeeping matter a great deal to the IRS even in your first year. Because it matters to the IRS, it matters to you, too.
Now, you might be right about the taxes. If you expect your business to have no net income (no profit) after expenses are subtracted…then usually no income tax nor self-employment tax will be due for that year. However, there is a key element to that thought that demands your attention: “after expenses”.
According to the IRS Publication 583 (this specific topic starts on page 9), most business expenses MUST be substantiated by proper documentation in order for the IRS to consider them a legit expense. In the event the IRS wishes to take a closer look at your tax return, and if your business has inconsistent books and little to no documentation to support those expenses, the IRS will likely disallow any alleged, unsupported expenses that you claimed. If you decide not to keep the books and document expenses, then all of a sudden that net income you thought you didn’t have becomes taxable on your tax return. Without documented expenses, your business seems profitable from a tax standpoint even though you may not actually be profitable. This is a nasty, unfair scenario. But it is a very real nightmare for many new small-business owners who decide the books aren’t worth their time or investment in the early years.
Start off right. Get QuickBooks Online or another bookkeeping software and use it. Learn how to implement a proper Accountable Plan. And, of course, talk to a CPA. This will cost you a few bucks, but your business (and your sanity) has a far better chance of survival if you do.
If your business has already been rolling for a while, change your behavior now and take the proper steps to get on the right path:
Talk to a CPA or bookkeeper, and
Begin to keep proper records.
If you are the lucky small-business owner that has so much work in the first year and no time for the books, then hire a good bookkeeper now. Future you will be grateful to the wise, current you.
