Advisory Services – Business Best Practices
Business Best Practices
Effective financial management is key to running a successful business. At Toran, we understand the importance of keeping your finances organized and accurate. In this section, we outline the critical financial reporting statements and best practices for managing business bank accounts and credit cards. These guidelines ensure compliance, facilitate audits, and help your business grow smoothly.
Accounting
Tax
Advisory
Bookkeeping
Small Business Accounting
Startup Accounting
Tax Preparation
Tax Planning
Small Business Tax
Reporting
Financial Reporting Statements
Accurate financial reporting is essential for tracking the performance and health of your business. Here are two critical financial statements every business must maintain:
01
Profit and Loss Statement (P&L):
This statement provides an overview of your income, expenses, and net income over a specific period. A P&L is crucial for assessing your business’s profitability, identifying trends, and making informed financial decisions.
02
Balance Sheet
Your balance sheet reflects your business’s assets, liabilities, and equity at a given point in time. It’s a vital document for understanding your company’s financial position. Precision is essential when preparing balance sheets, so it’s advisable to work with an experienced bookkeeper to ensure accuracy and compliance.
Bank Account
Bank Account Best Practices
Maintaining a separate and properly managed business bank account is essential for financial clarity and legal compliance.
Business Bank Account
Ensure your bank account is registered under the legal name of your business. Avoid using personal bank accounts for business transactions to ensure accurate financial reporting and transparency.
Signers on the Account
Consider who has access to the account and who is authorised to sign checks. Including your spouse may be beneficial for estate planning purposes.
Deposits
Always keep copies of all deposit slips and individual checks for audit purposes. Proper documentation is key to maintaining accurate financial records.
Cash Transactions
While cash transactions may seem convenient, they can complicate financial reporting. It’s best to minimize cash transactions and ensure that all cash income is properly reported.
Management
Credit Card Management
Proper credit card management helps streamline business expenses and build a solid financial foundation:
Business Credit Cards:
Use business credit cards to manage expenses effectively and build a credit history for your business. A strong credit history can help secure favorable terms for future loans.
Recording Expenses:
Retain receipts for all credit card purchases. Credit card statements alone are insufficient for audits, so detailed documentation is crucial.
Personal Guarantees:
If you’re starting a new business, you may need to provide a personal guarantee for business loans. This is a common requirement, but it’s important to fully understand the risks involved.
Cash Transactions:
While cash transactions may seem convenient, they can complicate financial reporting. It’s best to minimize cash transactions and ensure that all cash income is properly reported.
Years in Business
Record-Keeping
Documentation and Record-Keeping
Key Practices for Efficient Business Management
Maintaining proper documentation and organized record-keeping is essential for the financial stability and success of any business. At Toran, we emphasize the importance of maintaining accurate records and using effective bookkeeping software to streamline your operations. In this section, we highlight best practices for documentation, record retention, and software usage to ensure your business is always audit-ready and compliant.
Documentation
Documentation & Record-Keeping
Accurate and well-organized documentation is a critical part of running a business. It helps you stay compliant with tax regulations, manage financial operations efficiently, and be prepared for any audits or reviews. Here are the key guidelines:
Retention of Records
It is crucial to retain all essential business documents for at least seven years. This includes bank statements, credit card statements, receipts, invoices, and any financial records related to your business. Keeping these documents ensures that you have a clear paper trail, which is vital during tax preparation and audits.
Electronic Storage
Using cloud-based storage solutions like OneDrive, Google Drive, or Dropbox is highly recommended. These platforms provide secure storage and automatic backups, ensuring that your records are always accessible and protected from loss or damage. Digital organization also allows for quicker retrieval of documents when needed for financial reviews or audits.
Software
Bookkeeping Software
Utilizing efficient bookkeeping software simplifies financial management and helps you maintain accurate records. Below are some recommendations for effective bookkeeping:
Quick Books:
We recommend using QuickBooks for managing your profit and loss statements, balance sheets, and other financial reports. This software makes it easy to track income and expenses, while also allowing for standardized expense accounts. Standardization helps you compare financial performance year-over-year, providing deeper insights into your business’s growth.
Documentation in Software
While bookkeeping software is excellent for financial tracking, it’s a best practice to store important financial documents, such as receipts, outside of the software. Using separate cloud storage for receipts ensures they are easily accessible during audits without complicating your bookkeeping system.
Years in Business
Expenses
Maximizing Deductions and Managing Business Expenses
Essential Strategies for Financial Success
Properly managing business expenses is key to optimizing your tax strategy and maintaining financial clarity. Understanding which expenses are deductible and how to handle home office, travel, and employee-related costs can make a significant difference in your overall tax liability. At Toran, we guide business owners through these complexities, ensuring compliance and maximizing deductions.
Business
Business Expenses
Knowing which business expenses are deductible can lead to substantial tax savings.
Advertising & Incidentals
These encompass advertising, client gifts (capped at $25 per person, per year), and business meals, which are 50% deductible. Accurate tracking of these expenses ensures you’re claiming the maximum allowable deductions.
Auto Expenses
If you use a vehicle for business, you can choose between the standard mileage rate or actual expense method to deduct auto-related costs. Tracking all business miles carefully is essential for claiming this deduction and staying compliant with IRS guidelines.
Client Costs
Expenses directly tied to the production or sale of goods or services, such as materials and labor, are deductible. Accurately recording these costs helps reduce taxable income while ensuring proper financial documentation.
Home Office
Handling Home Office and Utilities
For business owners working from home, home office and utility deductions can provide valuable tax relief.
01
Home Office Deductions
To deduct travel costs, more than half of the travel days must be directly related to business activities. Note that spouse and dependent costs are generally not deductible unless they are actively involved in your business.
02
Utilities
Personal funds typically cover utilities, but you may be reimbursed by the business for the portion used in the home office, based on the percentage of your home used for business purposes.
Entertainment
Travel And Entertainment
When it comes to travel and entertainment expenses, knowing the specific rules can help you maximize deductions while avoiding mistakes.
Travel Expenses
To deduct travel costs, more than half of the travel days must be directly related to business activities. Note that spouse and dependent costs are generally not deductible unless they are actively involved in your business.
Entertainment
Since 2018, entertainment expenses are no longer deductible, but business meals remain 50% deductible, providing some relief for client-facing businesses.
Wages
Wages and Salaries
Accurately managing employee wages and salaries ensures compliance with tax regulations and proper business accounting.
Employee Pay
It’s essential to separate employee wages from owner compensation and follow all relevant regulations regarding fringe benefits and worker’s compensation. This helps maintain clarity in your financial records.
Children as Employees
Employing your children in your business can be a tax-efficient strategy when done correctly. By paying them reasonable wages for legitimate work, you may lower your tax liability while offering valuable work experience.
Employee
Independent Contractor vs. Employee
Ensuring Proper Worker Classification
Correctly classifying workers as either independent contractors or employees is crucial for maintaining compliance and avoiding costly legal and financial penalties. Misclassifications can lead to IRS audits, back taxes, and severe fines.
An employee works under your direct control and follows company policies, work hours, and specific tasks assigned by the business. They are paid through a W-2, and your business is responsible for withholding taxes, providing benefits like health insurance, and managing payroll taxes. Employees also receive benefits such as paid time off and retirement contributions.
An independent contractor operates with more autonomy, usually hired for specific projects or tasks. They supply their own tools and equipment and are paid through a 1099. Independent contractors handle their own tax obligations, including self-employment taxes, and have the flexibility to determine how and when to complete their work.
Misclassifying employees as independent contractors can trigger audits from the IRS or state agencies, potentially resulting in back taxes, penalties, and interest.
Classification
IRS Criteria for Worker Classification
The IRS uses three main categories to determine whether a worker is an employee or an independent contractor
Behavioral Control
If your business dictates when, where, and how tasks are performed, the worker is likely an employee. Independent contractors typically have more freedom in deciding how they complete their tasks.
Financial Control
This focuses on who covers business expenses and provides equipment. Employees usually have expenses covered by the company, whereas independent contractors handle their own costs and investments. If your business supplies all materials, the worker may be classified as an employee.
Relationship of the Parties
This evaluates how both parties view the relationship. Written contracts, the duration of the relationship, and whether the work performed is integral to the business all influence classification. Independent contractors typically work on a project-by-project basis and do not have the same long-term relationship as employees.
Hiring
Best Practices for Hiring Independent Contractors
When hiring independent contractors, follow these best practices to ensure proper classification and avoid potential IRS issues:
Always Get a Completed W-9
Before paying independent contractors, ensure you have a completed W-9 form, which includes essential information such as the contractor’s business type and tax identification number (TIN). This is crucial for issuing 1099s during tax season.
Issue 1099s Where Required
If you pay an independent contractor $600 or more in a year, you must issue them a 1099-NEC. Contractors operating as S-Corporations or C-Corporations are typically exempt from this requirement. Failure to issue necessary 1099s can result in disallowed expense deductions and IRS penalties.
Pay the Business, Not the Individual
Always make payments to the contractor’s business name rather than their personal account. This maintains clear financial records and ensures compliance with IRS regulations regarding independent contractors.
Ensure Contractors Have Their Own Insurance
It’s good practice to require independent contractors to carry their own insurance, especially if they work on your premises or use their own equipment. This reduces your business’s liability and strengthens the contractor’s independent status.
Classification
Common Pitfalls to Avoid
Despite best intentions, businesses often make mistakes when classifying workers. To avoid potential issues.
Failing to Issue 1099s
Not issuing 1099s to eligible contractors can lead to disallowed expenses and higher taxable income, increasing your business’s tax burden.
Mixing Personal and Business Payments
Always separate personal and business finances. Mixing payments can complicate financial tracking and lead to IRS red flags during audits.
Reporting Rules
New IRS Reporting Rules for Third-Party Payment Platforms
As of 2022, third-party payment platforms like Venmo, PayPal, and Cash App are required to report business transactions over $600 to the IRS. If you use these platforms for business transactions, ensure they are linked to a separate business account to avoid issues related to personal and business transaction mixing. By following these guidelines and best practices, your business can avoid misclassification issues and maintain compliance with IRS standards. At Toran, we provide expert support to ensure your worker classifications are correct and your business is safeguarded against potential legal and financial pitfalls.