Accounting for Sole Proprietors: Tax & Bookkeeping Tips

Henry Edwards33 said:The mechanic makes their money on the labor, while the parts retailer makes theirs on the markup.😉

I don't bother running parts through my inventory if I'm just buying them to maintain a company vehicle. It’s a massive headache for the paperwork and isn't really necessary. You buy the part and install it immediately—it's just a direct expense.
If I grab something that's already sitting in my stock, I just use a requisition slip, and there's no need to worry about calculating sales tax on it.

A couple of years back, when I reached out to the IRS for some guidance, they told me that if I'm billing for both parts and labor on the same invoice, I had the discretion to list the parts at either the discounted price or the full retail price—it was basically my call. But lately, I've been hearing whispers that those days might be over, and honestly, it's left me feeling completely turned around.😬

And what happens if, alongside general maintenance and repair services, a business is also registered under NAICS codes for retail brokerage or specialized wholesale of automotive parts and accessories?

Also, why would someone use a delivery slip instead of a work order—is there some kind of catch there? I always assumed a delivery slip was supposed to lead to a final invoice. If no invoice is ever generated, doesn't that slip just end up hanging around in the files forever without purpose?

cosmictinker24 said:I guess you're right there... I'll record it in the KPI, but the software just won't pull it into the sales tax return automatically. I end up having to manually add it myself when I file with the IRS...
I actually tried entering it under the "Pre-EU Sales Tax" section in the standard IRA ledger; the system picked it up in the KPI, but once again, it failed to populate the actual tax form...
I honestly don't see any other way to handle it!

The catch is that if you ever get audited, they’re going to cross-reference your sales tax filings against your IRA ledger, and that's where you're going to run into trouble. Maybe—and I'm just spitballing here—you could try processing that invoice through Accounts Receivable just so it hits the KPI, then manually list it in the IRA ledger?🤔🤷

A small business client of mine currently has several outstanding invoices owed to a supplier totaling roughly $2.00 (we're looking at about ten different invoices here). These bills date all the way back to 2006 and 2009, and they've just sat there untouched—no one ever chased them down or initiated any legal action. Based on my understanding of the statute of limitations, these should have expired after three years. I'm trying to figure out the proper accounting procedure to write off this stale debt: specifically, how do we actually clear these from the books and which accounts should they be posted to? Also, do we need to obtain some kind of formal documentation from the supplier to justify closing these out due to the expiration of the claim?

How exactly am I supposed to book a donation?
Is this being handled as a direct wire transfer from a checking account?

cosmictinker24 said:How exactly am I supposed to book a donation?
Is this being handled as a direct wire transfer from a checking account?

Just draft a formal resolution and book it under 4860 - Donations for Public Interest(This covers cash or in-kind gifts up to 2% of last year's total revenue for things like culture, science, education, healthcare, humanitarian aid, sports, religious causes, environmental stuff—think local nonprofits, independent artists, or community groups—per IRS guidelines)

Jack Young said:Just draft a formal resolution and book it under 4860 - Donations for Public Interest(This covers cash or in-kind gifts up to 2% of last year's total revenue for things like culture, science, education, healthcare, humanitarian aid, sports, religious causes, environmental stuff—think local nonprofits, independent artists, or community groups—per IRS guidelines)

I suppose that applies to an LLC, but what about freelancers? Is the rule the same for them as it is for small business owners?

Brenda Chase3 said:A small business client of mine currently has several outstanding invoices owed to a supplier totaling roughly $2.00 (we're looking at about ten different invoices here). These bills date all the way back to 2006 and 2009, and they've just sat there untouched—no one ever chased them down or initiated any legal action. Based on my understanding of the statute of limitations, these should have expired after three years. I'm trying to figure out the proper accounting procedure to write off this stale debt: specifically, how do we actually clear these from the books and which accounts should they be posted to? Also, do we need to obtain some kind of formal documentation from the supplier to justify closing these out due to the expiration of the claim?

You really need to draft a formal debt forgiveness decision regarding those suppliers due to the statute of limitations, and you have to list every single invoice individually. Since these fall well under $1667, they are tax-deductible. There isn't a specific place to book this on the small business owner's side. Those invoices are likely still sitting there as unpaid in the IRS records. My advice would be to use that debt forgiveness decision to clear them out in the IRS books and attach the decision itself so there's a clear paper trail of why the action was taken.

rowdyhawk25 said:You really need to draft a formal debt forgiveness decision regarding those suppliers due to the statute of limitations, and you have to list every single invoice individually. Since these fall well under $1667, they are tax-deductible. There isn't a specific place to book this on the small business owner's side. Those invoices are likely still sitting there as unpaid in the IRS records. My advice would be to use that debt forgiveness decision to clear them out in the IRS books and attach the decision itself so there's a clear paper trail of why the action was taken.

Thanks, rowdyhawk25. I’m a little fuzzy on the closing part, though. If I close them out in the IRS books, wouldn't they automatically be recorded as expenses (in my view, as kind of an in-kind gain)? Is that the correct way to handle it? And what happens to the sales tax on those invoices?
If I'm understanding this correctly, if they aren't tax-deductible, they would be booked as in-kind income? And since they are expired and the invoices are less than $1667, then they get booked as an in-kind expense?
I've been trying to hunt down some articles online that explain this in more detail, but I haven't had much luck so far.

Brenda Chase3 said:Thanks, rowdyhawk25. I’m a little fuzzy on the closing part, though. If I close them out in the IRS books, wouldn't they automatically be recorded as expenses (in my view, as kind of an in-kind gain)? Is that the correct way to handle it? And what happens to the sales tax on those invoices?
If I'm understanding this correctly, if they aren't tax-deductible, they would be booked as in-kind income? And since they are expired and the invoices are less than $1667, then they get booked as an in-kind expense?
I've been trying to hunt down some articles online that explain this in more detail, but I haven't had much luck so far.

Hmm, I'm not entirely sure. Usually, writing off bad debt from customers counts as in-kind income and you have to account for sales tax regardless of how old the debt is—unless the person is going through bankruptcy or liquidation and it becomes impossible to collect. But regarding this specific situation, I can't say for certain. 🤷 I think I might be mixing up the rules for an LLC and a sole proprietorship.

So, I’ve got this bit of a mess on my hands that I’m hoping to untangle soon—hopefully with a little help from you all! My godmother handles the bookkeeping for my husband’s small repair business. He basically does odd jobs and minor repairs, and most of the time he gets his spare parts at a discount, but then he charges customers the full retail price. He usually undercharges for the actual labor itself just to keep things moving, so he's kind of just scraping by, I guess. From what I can see, she keeps really thorough records of what they owe and what's owed to them, and they stay totally on top of their bills. But here's the kicker: everything for those parts was paid for in cash. On the official invoices, he’s only been listing the labor. His logic—if you can call it that—is that if anyone asks, he can just say the customers handed him cash for the parts directly, making it their expense rather than a business cost. There are actually quite a few of these invoices, and many of them are wholesale receipts issued to their LLC, so everything is technically documented somewhere... plus they did get that discount, after all. Am I right in thinking that all of this really should have been recorded properly and billed on the main invoice? I suppose they’re avoiding doing it because they don't want to trigger the threshold to start paying sales tax.

Thanks so much in advance!

cosmictinker24 said:Hey there.

I’m looking for some insight regarding renting out a portion of a commercial space. Here’s the setup: an individual owns an apartment and uses part of it to run their own business (so, they're generating income from it), but they want to lease a section of that space to someone else who is self-employed. Technically, the property isn't held as a business asset; it's just owned by them as a private individual. I’ve come across a few different interpretations of how the IRS handles this, so I’m curious to hear what you all think about it.
Thanks, everyone!

So... does absolutely nobody know anything about this?

cosmictinker24 said:So... does absolutely nobody know anything about this?

That shouldn't be an issue. You simply draft a lease agreement, and since the landlord is running a business, they should issue a monthly invoice reflecting the rent amount.
If the landlord is registered for sales tax, you deal with them directly; if not, they’ll need to report the lease to the IRS so the tax liability can be properly assessed...

One also needs to consider their own business operations. Based on your question, it seems the business is currently registered at that specific address, but if they are moving elsewhere, a change of address must be filed.
Unless, of course, they are only renting out a portion of the property, in which case both parties would continue operating their businesses out of the same space, leaving everything as it stands.

edit: There is no longer a distinction between business assets and personal assets during a sale or rental; you handle the property under the same rules regardless of whether it belongs to the business or the individual...

amberdrifter14 said:That shouldn't be an issue. You simply draft a lease agreement, and since the landlord is running a business, they should issue a monthly invoice reflecting the rent amount.
If the landlord is registered for sales tax, you deal with them directly; if not, they’ll need to report the lease to the IRS so the tax liability can be properly assessed...

One also needs to consider their own business operations. Based on your question, it seems the business is currently registered at that specific address, but if they are moving elsewhere, a change of address must be filed.
Unless, of course, they are only renting out a portion of the property, in which case both parties would continue operating their businesses out of the same space, leaving everything as it stands.

edit: There is no longer a distinction between business assets and personal assets during a sale or rental; you handle the property under the same rules regardless of whether it belongs to the business or the individual...

If the landlord isn't registered for sales tax and the commercial space isn't tied to a business entity, they can just pay the flat tax on income from the property—calculated as 70% of the rent times a 12% tax rate—right? Or has the tax code shifted on me recently?

placidlynx92 said:If the landlord isn't registered for sales tax and the commercial space isn't tied to a business entity, they can just pay the flat tax on income from the property—calculated as 70% of the rent times a 12% tax rate—right? Or has the tax code shifted on me recently?

So, we're talking about someone operating as a freelancer under a sales tax ID, but the property itself isn't tied to their business...
they bought an apartment as a private individual and are renting it out just like that...
now I'm reading that they should be issuing invoices with sales tax regardless of whether they lease it as a private citizen or through a business, as long as they're registered for sales tax? It's all about whether they're in the system or not?
It doesn't really make sense to me!

cosmictinker24 said:So, we're talking about someone operating as a freelancer under a sales tax ID, but the property itself isn't tied to their business...
they bought an apartment as a private individual and are renting it out just like that...
now I'm reading that they should be issuing invoices with sales tax regardless of whether they lease it as a private citizen or through a business, as long as they're registered for sales tax? It's all about whether they're in the system or not?
It doesn't really make sense to me!

But that's just how it works. If his Tax ID is registered for sales tax, then he has to issue those invoices for the rent.

Lisa Nelson4 said:So, I’ve got this bit of a mess on my hands that I’m hoping to untangle soon—hopefully with a little help from you all! My godmother handles the bookkeeping for my husband’s small repair business. He basically does odd jobs and minor repairs, and most of the time he gets his spare parts at a discount, but then he charges customers the full retail price. He usually undercharges for the actual labor itself just to keep things moving, so he's kind of just scraping by, I guess. From what I can see, she keeps really thorough records of what they owe and what's owed to them, and they stay totally on top of their bills. But here's the kicker: everything for those parts was paid for in cash. On the official invoices, he’s only been listing the labor. His logic—if you can call it that—is that if anyone asks, he can just say the customers handed him cash for the parts directly, making it their expense rather than a business cost. There are actually quite a few of these invoices, and many of them are wholesale receipts issued to their LLC, so everything is technically documented somewhere... plus they did get that discount, after all. Am I right in thinking that all of this really should have been recorded properly and billed on the main invoice? I suppose they’re avoiding doing it because they don't want to trigger the threshold to start paying sales tax.

Thanks so much in advance!

So he didn't record the purchase of any parts in the books? That's a little sketchy.😁

The way you're thinking about it is definitely the correct way.
I don't quite follow how he actually collects money for the parts?
He pays for them out of his own pocket, so he'd need to get that money back from the customer somehow. I highly doubt he's just handing out parts for free. 🤣
If he's taking cash under the table, then there's really no point in putting it in the official books. 😁

cosmictinker24 said:How exactly am I supposed to book a donation?
Is this being handled as a direct wire transfer from a checking account?

So, even though I logged the donation as an expense on my P&L, my accountant basically told me, "Nope, don't do that." Turns out, you're actually supposed to use that amount—up to 2% of last year's gross receipts—as a personal deduction when you file your tax return instead...

Hi everyone,
I was hoping someone might be able to point me in the right direction regarding withdrawing from a general partnership business, as I’ve been scouring the web for guidance and haven't had much luck—my apologies if this has already been covered elsewhere. Here is the situation: we have a family-run small business that has been operating since 1992. It is currently a partnership between a father and his son, who joined as a co-owner back in 2010. Now, come May 26th, the father—who acts as the primary proprietor—is terminating the partnership agreement to step away entirely. This leaves the son as the sole owner, which necessitates a new Tax ID number...
So, here is my dilemma: does anyone know if I am handling this correctly? To be honest, the logic seems a bit skewed to me. The folks over at NOAA were insisting that to process the departure of the current partner, we need to deregister all the employees and then issue entirely new registrations and contracts for the remaining owner. On top of that, they suggested we deregister the business itself, which feels completely nonsensical to me. I mean, isn't it still the exact same entity? If we follow their lead, it essentially looks as though the son is opening a brand-new business from scratch, despite the fact that he’s been an official co-owner since 2010. Why on earth would the entire business registration need to be terminated? Any insight would be greatly appreciated.

amberbadger17 said:So, even though I logged the donation as an expense on my P&L, my accountant basically told me, "Nope, don't do that." Turns out, you're actually supposed to use that amount—up to 2% of last year's gross receipts—as a personal deduction when you file your tax return instead...

I went ahead and asked about it, and I think I read somewhere else too...
I'm probably not going to book it as an expense. I'll just include it as a deduction on my tax return at the end of the year.

cosmictinker24 said:I went ahead and asked about it, and I think I read somewhere else too...
I'm probably not going to book it as an expense. I'll just include it as a deduction on my tax return at the end of the year.

And listen, make sure you grab a copy of that statement showing the donation payment immediately. You’re going to need to attach it to your Form 1040—if you don't, the IRS will just ignore it entirely. It won't fly without proof.😬

You can actually bypass the need for an official transcript if you have the formal decision—basically, just a donation receipt. If you're donating through a local community center or a non-profit, they should be sending you a confirmation statement directly. It’s pretty straightforward. Sometimes small business owners will drop off their donations in cash rather than doing a bank transfer, so it won't show up on your digital statements. Personally, I have my donors send me a formal confirmation every single year without fail; I just attach those to my tax return and call it a day.