TaxesTuesday: Taxes 201 – Chart of Accounts
Believe it or not, having a properly set up chart of accounts will save you time and money when it comes to tax season. It will save you the time of trying to match your expense accounts into the IRS Categories on the Schedule C or the 1120S, depending on which type of tax entity you are (for more information on this, see our first TaxesTuesday post: https://volpeconsulting.wordpress.com/2016/06/14/taxestuesday-episode-i-small-business-taxes-101/).
Your tax preparer will spend less time matching your accounts to the IRS accounts, and with better tracking of your expenses, you could very well end up decreasing your end of the year tax liability. So, let’s get started!
The IRS actually provides St. Louis businesses with a list of the accounts that they are interested in on their tax returns, usually a small business will use a Schedule C or an 1120S for these purposes. While, an entity that files the Schedule C does not need to submit their Balance Sheet, it is still a good idea for them to use similar accounts to those contained on the 1120S Schedule L to track accounts that do not appear on the profit and loss statement.
The trouble that we run into is that using just these accounts does not always provide us with the details that we need to be able to properly advise our clients especially when performing financial analysis. The solution to this is to use the IRS accounts as what is called a Parent Account and to put the detail accounts in as Child (or Sub) Accounts. This will allow you, when that dreaded time of year approaches, to click one button and collapse the detail accounts into the parent accounts that are needed on your tax returns. You can then turn this Profit and Loss (or Income Statement) into your tax preparer at the end of the year, and ‘pocket’ the $150.00 per hour that they would have charged you to clean up your accounts!
To be honest, there is only one small draw back to this: you can take your tax preparation fees off on your taxes, so that deduction will be smaller than in past years. Don’t worry! I am sure you can ‘find a way’ to put that money to good use in your company!
Now, instead of just talking about it, let me give you some actionable information. Below are the Categories (of Accounts that you will use as Parent accounts) that the IRS is interested in. These accounts are also color coded, so that you can see which type of account to classify these as in your chart of accounts.
Green: income; Blue: Cost of Goods Sold; Red: expenses; Purple: Assets; Gold: Liabilities; Silver: Equity
Next Week on TaxesTuesday: Taxes 202 – Cost of Goods Sold
Back to Class!
The Volpe Consulting & Accounting Team