Does your chart of accounts reflect your current business operations? If you haven't revised your chart of accounts since you initially set it up, you may be missing out on an easy way to simplify your business's financial life. That's because your chart of accounts is more than a basic bookkeeping tool. Your chart can also help you keep track of items that affect your tax return.
For example, your business income may have multiple sources, including the sale of goods and services to customers, rents, royalties, interest, dividends, gains from the sale of business and investment assets, and "miscellaneous" receipts. These different types of income are treated differently under federal income tax rules and appear in different places on your return. Arranging your income accounts for tax-specific categories can streamline tax preparation time and reduce misstatements.
Expense accounts can benefit from organization too. For instance, you'll want to separate allowable deductions, such as ordinary and necessary business costs, from expenditures that produce benefits in future taxable years, such as equipment. That keeps your depreciation schedule current, highlights assets you've purchased and disposed of, and ensures proper reporting on federal, state, and local returns.
In addition, some income tax deductions are based on specific business income and the related costs. The domestic production activities deduction is an example. Calculating this tax benefit requires separating income and expenses attributable to certain qualifying activities such as real property construction. Setting up your chart of accounts to capture the necessary information is a year-end time saver.
Nondeductible expenses are another category that can benefit from tax-specific accounts. Those include dividends paid to shareholders, expenses associated with tax-exempt income, certain entertainment costs, and penalties and fines.
Organizing your chart of accounts to accurately track business events that affect your taxes can be cost-effective. Contact us for tips on the best way to get the most benefit.
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The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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145 Tower Drive, Suite 4
Burr Ridge, IL 60527
Phone (630) 320-3720
To better serve our clients and friends, to keep you up-to-date and informed, our blog is a resource for tax tips and overall accounting related articles. We hope you find this useful!