Bookkeeping is the tracking of income and expenses throughout a period of time. Usually is done on a monthly basis and then many review reports are based on a monthly, quarterly, and yearly basis. Taxes is the amount we owe as business owners to the IRS for the income we made in the business. Bookkeeping helps us prepare and figure out taxes but there are some expenses that are listed on bookkeeping but not on taxes. There are also expenses that are counted as deductions on taxes but don’t get counted in bookkeeping.
What is bookkeeping?
Bookkeeping is your business’s backbone. It is one of the most important parts of a business. The only way a business can be successful is if the bookkeeping is done regularly so you keep up with your financial status. Bookkeeping is the process of keeping track of the income coming in and the expenses paid.
What is taxes?
There are several types of taxes. Today we are going to talk about the taxes small business owners pay for the income they made in their business. This is usually filed and is fully paid when you file your taxes annually at the beginning of the following year known as the tax season. Many small businesses need to pay quarterly taxes on their income. That is where bookkeeping is helpful to estimate what is due.
As small business owners, we end up paying our portion of income taxes plus half of the employer income taxes. If you are incorporated then you end up paying both portions of income taxes for yourself and being an employee of your business. When we file our taxes for the previous year, we are declaring what we made as income for the previous year. We also like to find as many deductions as possible to keep the taxes low.
How are bookkeeping and taxes similar?
All income is reported on both bookkeeping and taxes. The only income that isn’t counted toward taxes due is the non-taxable income but it is still required to report on both bookkeeping and taxes. An example of non-taxable income that many small businesses are aware of is the PPP loans that were given in the last few years. Those lows have usually been forgiven and were counted as other non-taxable income but were reported on both bookkeeping and taxes.
Most expenses are reported on both bookkeeping reports and taxes. Examples of expenses that are counted on both are as follows:
Commissions and Fees
Depreciation of Assets
Mortgage of Office, Storage, or Manufacturing Center
Legal and Professional Services
Rent or Lease of Office
Rent of Lease of Vehicles
Repairs and Maintenance
Business Taxes (not personal income taxes) and Business Licenses
Business Office, or Manufacturing Center Utilities (not personal home office utilities)
Business Vehicle Expenses (not a vehicle used for both personal and business)
Corporate Rent for those who are incorporated and work from home
If you are unsure if a business expense is a write-off on taxes consult with an accounting professional. This is just a list of the common business expenses. Some businesses have other expenses that can be included as well in some situations. It is best to use these as your main accounts in bookkeeping so it is easy to feed into your taxes and your reports will be very easy to review and compare between bookkeeping and taxes.
What is different when reporting taxes vs bookkeeping reports?
You may have noticed I haven’t mentioned one of the most common business expenses, business meals. This one is a tricky one. In bookkeeping, we report 100% of the business meals. However, in taxes, we can only write off 50% of the business meals. If you look at your P&L and your taxes side by side, you will see that only 50% of those meals were written off. The reason for this is that the IRS figures we have to eat either way. We have a personal need to eat. If we are out on a business trip or meeting with business clients or with business colleagues, we are allowed to write off 50% of the costs incurred for those meals on taxes.
There are also a few common business expenses that don’t get reported on bookkeeping but are business write-offs as a business owner. The use of your personal home for business. This one is calculated by the percentage of your home that is used solely for business vs the rest of your home. For example, you have a 1000-square-foot home, and your office is 100 square feet. Then you would be able to write off on taxes only 10% of your home utilities and rent or mortgage expenses. Keep in mind, the Use of a home office is not reported on bookkeeping at all. If you are incorporated talk to an accounting professional about corporate rent. Corporate rent is a better option for those who are incorporated.
The only other common business expense that isn’t reported on bookkeeping but is reported on taxes is the use of a personal vehicle. When you use a personal vehicle for business too, keep track of your miles. The calculation is based on how many miles you used for business vs personal. My personal favorite way to keep track of miles is Miles IQ. There are lots of apps out there that keep track of your miles, as long as you love it and it will separate your personal and business miles it is a good one. Each year there is a per mileage rate that is given. Keep in mind for 2022, there were two mileage rates. For January 1st, 2022- June 30th, 2022 the rate was 58.5 per business mile, then it went up from July 1st, 2022-December 31, 2022 to 62.5. So, you will need to have two different mileage numbers for taxes in 2022.
Want a free chart to hang up on your wall in your office or have on your desk?
I have a free chart on the Bookkeeping and Taxes differences that will help remind you of what I shared with you today.
Do you need help with your taxes?
I personally only do bookkeeping and would be more than happy to help you with any of your bookkeeping needs. If you need a great tax accountant, call Maggie Gillespie, EA from Paramount Tax in Orem, Utah. She is phenomenal, just tell her I sent you and she will take good care of you!