And why does the bookkeeping have to be in accounting software?

You’re here because you’re either getting started on your bookkeeping journey (with or without accounting software) or because you’re wondering why you even need to keep going. After all, it’s been fine before, right? Isn’t this just adding a cost and/or busy work? To that, we say a resounding, “no.”

Bookkeeping gives you valuable insights into your business. And it reduces compliance burden later down the road.

Even if your business is pretty simple. Even if you have one or two sources of income and only a small handful of deposits. After all, you’re just a single person offering a service or selling a few things. You don’t have very many expenses. You don’t (think) you need bookkeeping software.
I’m here to dispel those myths because, as a small business owner, you need to do some level of bookkeeping and you’ll be most successful if you’re using accounting software to do it. Yes, we’re biased around here. But, we’re not biased because we want you to spend money on something. Far from it. We’re biased because bookkeeping software gives you advantages.

Here’s the TLDR:

  • Meeting Compliance Requirements – by using accounting software for your bookkeeping, you’re using a level of organization that will help you meet compliance requirements.
  • Less stress at tax time – doing your bookkeeping year round means you can just hand the books over for tax return preparation. No more digging for expenses at the last minute.
  • Navigate Change – Have your profits increased? Decreased? Not sure if thee change is significant? Your bookkeeping, done right and well in accounting software, can answer these questions. It also helps us help ou understand what’s going on with you business and how that impacts your taxes. Not to mention navigating change with grace and confidence.
  • Thinking about selling your business? You’ll need hte reports accounting software produces, and you’ll need them at a moment’s notice.
  • Do you need (or want) a loan? Accounting software can help you show reports and other information to a loan officer.
  • Navigating Nexus – in a global world, even the smallest businesses are multi-state, international businesses. Using accounting software for your bookkeeping makes this information easier to track.

Not quite convinced? We’ve gathered a few common questions here.

Tax Agency Audits & Compliance

Even if you’re using a business bank account, these audits are significantly easier and more straight forward to navigate and have a quality result if we have bookkeeping to give to the auditor rather than bank statements and notes with maybe a few receipts sprinkled in.
Using bookkeeping software can show you’re running your business in a business-like manner. As recently as 2023 , the US Tax Court sided with the IRS because the taxpayer did not maintain complete and accurate records or a separate bank account for the business activity claimed on their tax return (Kraske v. Commissioner, TC Memo 2023-128). While this case was specifically looking at Hobby Losses and the viability of a business, the decisions of the Tax Court can help us see authorities’ thinking. It’s standard and general practice to make use of an accounting system, and today that means modern, double-entry accounting software.

Can't you just do it all for me!?

We don’t do the bookkeeping – not the day to day categorizing and not even the monthly reconciliations. Our strength is with taxes and education, and we find we’re able to provide services that work to our strengths when we’re focused on those, and not on the weeds of your bookkeeping.
We do partner with several bookkeepers and are happy to refer you to one of them if you’d like to have someone take care of this for you.

What's the bare minimum I need to do?

You can learn more about starting your accounting fresh here. As a starting point, you will need to:
  • Select and make use of accounting software
  • Set up and maintaining a business-use-only checking account (we use and recommend Relay – ask us for an invitation)
  • Review your accounting regularly
  • Categorize transactions regularly
  • Record and update checks paid (these don’t import with details)
  • Reconcile your bank account monthly

We Require Businesses to Use Accounting Software

Crayon Advisory, LLC requires all businesses we work with to use accounting software during the year to track their income and expenses. We will help and support you through your transition into a double-entry accounting system. That support is more than just getting started though, and is limited without an active engagement. If you’re looking for support, you’ll be given options during the onboarding process.

But I'm not an Accountant

No. You’re likely not, especially if you’re reading this. However, you are a business owner, and you own a business because you’re good at what you do. I recommend the accounting software that I do because it’s low-cost, provides you with the tools you need, and turns accounting into more of a matching game than working with numbers.

What will this do besides cost me money?

Besides making tax return preparation easier and smoother, keeping up on your bookkeeping can help you spot trends faster and make business decisions in a proactive manner. During the pandemic, small businesses with up to date accounting had and easier time applying for assistance. It’s also easier to spot expenses that may be duplicative or unnecessary, and help ensure you’re receiving a return on your investment.
Accounting is a language of business. It’s your business’s story written in numbers. It can be produced for yourself, a banker, a buyer, and many others as necessary. It’s one of those things that if you don’t have it when you need it, you’re scrambling to make it happen. Adopting this before it’s necessary provides you with smooth sailing later.

When and how can I skip this.

It’s unlikely you can. There may be a very few instances in which bookkeeping isn’t strictly necessary:
  • Rental property with a property manager tracking the activity on your behalf
  • Single year consulting for less than $20,000 and not expected to continue
  • Honorariums

Do you have more resources?

We’re nothing if not chock-full of resources. 

Sliding into accounting software is a really good start, but, it’s not the only step you’ll need to take.

You’ll also need to use your accounting software regularly for your bookkeeping needs. This includes reviewing transactions, categorizing them, adding relevant details, and more.
You’ll also need to keep back-up information beyond Signing up for accounting software and connecting it to your business bank account isn’t quite enough. You also need to make use of the accounting software and keep back-up records of the information going into the accounting software. In 2023, a district court sided with the IRS when a taxpayer presented financial reports from accounting software as proof of their deductions (Kouza v US, 203 PTC 280 ED Michigan 2023)). Just a Profit & Loss and Balance Sheet were not sufficient to support the deductions included on the tax return.
Further, the court did not accept the tax preparer’s reliance on reports produced by accounting software. This is why we ask for access to your cloud based software or a general ledger report if you’re not using cloud-based accounting software. The details left behind in the general ledger provide us with the ability to ask quality, relevant questions about what happened during the year. Sometimes, this includes asking for substantiation (receipts & invoices). And, sometimes, it’s just the story or explanation of what happened that lead to the expense that we need for tax return preparation.

At a minimum, you should keep the following back-up records for substantiation:

  • Bank & Credit Card Statements – we’ll ask for statements inclusive of 12/31 of the ending year as well as statements for the month a bank or credit card account is closed during preparation. We expect and encourage you’ve kept the entire years’ worth of bank statements saved in your preferred file saving method.
  • Receipts & Invoices – yes, these do still need to be kept, even if we don’t ask for them. The IRS requires you to keep the following receipts/invoices for substantiation:
    • Meals – any meal has to be substantiated with a receipt showing where you ate and information about the business purpose of the meal. This may include calendar appointments with clients, colleagues, or partners, notes about what you discussed, and any other relevant information. This includes travel meals, though the business purpose may just be, “travel to conference.”
    • Travel – any travel expenses have to be substantiated with a receipt documenting where you were at, the amount you spent, and the business purpose of the travel. If you have mixed-purpose travel (business and personal), please be sure to tell us so we can ask you additional questions and guide you in making sure you deduct everything possible. It’s best to do this in advance so we can help you make decisions for your travel plans. If we only know about this after the fact, we can only help you react.
    • Charitable Contributions – this one is a little bit odd for most US small businesses, because most US small businesses can’t deduct charitable contributions as a business expense. I still keep this here, because many US small businesses make donations through their businesses. The short of it: if you donate more than $250 to any one charitable organization during the year, you have to have a letter from that organization dated no later than the due date of the tax return (or the date filed if earlier than the due date) that shows the organization’s EIN, address, how they qualify as a charity, the total you donated, and the fair market value of any benefit you received (swag like bugs, tote bags, raffle winnings, etc). These statements will be handled differently by different charitable organizations.
  • Others – The substantiation doesn’t stop here! Technically, you should have a receipt or invoice for every business expenditure. We won’t generally ask for receipts other than for large purchases of $2,500 or more, smaller purchases made to build something large, and/or purchases made with a loan for the purchase (large equipment loans, for example).

This post has been developed as a generic explanation of Why Accounting Software is necessary. This information is written to be informative and is not tax advice. You should consult with your tax advisor as to how this information applies to your situation. Your specific needs may vary and may cause specific attention to need to be given to your processes. You should speak with your tax professional regarding the applicability of these issues to you and your business (and, yes, that includes Crayon Advisory if you are a current or onboarding client).

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