Accounting for Sole Proprietors: Tax & Bookkeeping Tips

Edward Stewart said:I’ve been pouring over the IRS instructions, and even though this was touched upon earlier in this thread—specifically on page 223—I’m still feeling a bit lost regarding 🤔 where exactly one is supposed to enter the depreciation amount within Part II ("Expenses") of the PPI form.
Item II.9. states that the total expenses are calculated as 1+2+3-7-8. Now, Item II.4. ("write-off rate expenses") seems like the logical place for depreciation, but since it isn't added to the sum, the figure doesn't actually impact the total expenses, which ultimately means it doesn't touch the net income. So, where (and more importantly, why) should the depreciation amount be recorded? Should it go under II.3 ("in-kind expenses") or II.4 ("write-off rate expenses")? (I recall a fellow forum member previously suggesting it belongs in II.4)
I didn't have any depreciation to deal with in previous years, so I never really noticed this quirk, but I seem to remember from a few years back that the breakdown of receipts and expenses was much more intuitive—it showed subtotals alongside depreciation, making the total expense figure, and consequently the final total (income = receipts - expenses), perfectly clear.

Since I’m already burning through my ink 🙂 I have one more question... when entering the depreciation percentage into the DI form on the IRS website, does the number of decimal places matter? (For instance, I have 7 months of a 2-year depreciation cycle, which would work out to 29.16666% of the value). Does that mean next year I'll be entering 29.17 + 50, or just a flat 50% for 2019?

Because of that mathematical inconsistency you pointed out, I personally feel like depreciation ought to be listed under non-cash expenses, because if you try to put it under write-off rate expenses, the form just throws an error message at you...

Regarding the depreciation percentage on the DI form, you just enter the standard 50% rate without doing any manual conversions. Since the form asks for the asset purchase date, it’s implied that you've already calculated the depreciation proportionally based on the specific number of months...

Nathan Kim5 said:Because of that mathematical inconsistency you pointed out, I personally feel like depreciation ought to be listed under non-cash expenses, because if you try to put it under write-off rate expenses, the form just throws an error message at you...

Regarding the depreciation percentage on the DI form, you just enter the standard 50% rate without doing any manual conversions. Since the form asks for the asset purchase date, it’s implied that you've already calculated the depreciation proportionally based on the specific number of months...

I appreciate you getting back to me on this. After weighing everything I've read, I find myself landing on that same conclusion—it seems to be the only logical takeaway from the data available. However, I can't help but feel a bit restless about the "why" behind it all. I would truly value understanding the underlying reasoning that leads us to this specific point.
I have never personally dealt with in-kind expenses, so I’m still trying to wrap my head around what exactly falls under that umbrella. It leads me to wonder if it makes sense to assume that everything gets lumped into section II.3—including depreciation—and then section II.4 exists merely as a way to specify how much of that total amount is actually depreciation? In my specific situation, those two figures would end up being identical. I haven't actually sat down to input the DOH or the PPI into the IRS system yet, but my working theory is that as long as II.3 is greater than or equal to II.4, the system shouldn't trigger an error message.

Nathan Kim5 said:Because of that mathematical inconsistency you pointed out, I personally feel like depreciation ought to be listed under non-cash expenses, because if you try to put it under write-off rate expenses, the form just throws an error message at you...

Regarding the depreciation percentage on the DI form, you just enter the standard 50% rate without doing any manual conversions. Since the form asks for the asset purchase date, it’s implied that you've already calculated the depreciation proportionally based on the specific number of months...

It strikes me as somewhat illogical, if I may be so bold, because back when we were navigating the old DI system, there wasn't even a Column 7 dedicated to the "write-off rate." There was only the "write-off amount," which is what we see today sitting over in Column 8.
It would honestly make far more sense if the breakdown were structured as 29.17% for 2018, followed by 50% for 2019, and finally 20.83% for 2020; after all, the total depreciation period is clearly displayed right there in column 6 under "Useful Life."

I had a quick question about filing the electronic P-DOH with the IRS. Up until now, I’ve always done everything on paper—which meant I just handed over all the supporting documents along with the forms—so I was wondering, do you guys still upload everything as PDFs, or do they just give you a call if something looks a bit off?
Also, I’m dealing with a bit of a messy situation regarding our point-of-sale records. Last year, we took a lump sum from a customer as a cash deposit—basically, we processed three of his separate bills all at once—but we totally missed making the void entries for those original transactions on the bank account, and we didn't issue new, properly registered cash receipts either. Is there actually a way to fix this mess? Or should I just play dumb and pray to God that we don't get audited?

Lisa Nelson4 said:I had a quick question about filing the electronic P-DOH with the IRS. Up until now, I’ve always done everything on paper—which meant I just handed over all the supporting documents along with the forms—so I was wondering, do you guys still upload everything as PDFs, or do they just give you a call if something looks a bit off?
Also, I’m dealing with a bit of a messy situation regarding our point-of-sale records. Last year, we took a lump sum from a customer as a cash deposit—basically, we processed three of his separate bills all at once—but we totally missed making the void entries for those original transactions on the bank account, and we didn't issue new, properly registered cash receipts either. Is there actually a way to fix this mess? Or should I just play dumb and pray to God that we don't get audited?

Last year, I attached the Kazan and Township calculations, though the DI and all the IRS filings are visible to them directly through the online portal anyway.

To follow up on my previous thoughts regarding the PPI and DI forms... well, I just successfully cleared my audit.🙏
Regarding the PPI, following the suggestion made by Nathan Kim5, you should put the depreciation under section II.3, though you can also—but certainly don't have to—input it into II.4 (I chose to do so, which resulted in the line items matching up perfectly).
As for the DI, the system accepts it even if you input the actual write-off rate for the specific year (in my case, based on a two-year schedule, I had 7 months in 2018, the entirety of 2019, and 5 months in 2020; so for 2018, I entered 29.17% in column 7, then the corresponding portion of the amount in column 8, and the remainder in column 9. Of course, one must remember to manually update the totals at the bottom since the software doesn't handle that automatically).
It is quite convenient that you can actually repurpose last year's DI so you aren't stuck re-entering every single entry from scratch. If you haven't saved a copy of last year's DI, you can simply open the submitted version, select "Save," strip away the digital signature, and then feel free to update it by adding new entries or merely adjusting the year on the cover page.

Thanks a bunch! I guess I'll just go ahead and submit everything exactly the same way I've been doing it with my paper copies.

Regarding those non-registered receipts, though—has anyone else here dealt with a similar mess before?

I have another quick question

So, I'm working through the IRS forms—specifically Form DOH, page 4, line 5. I just copied over the income amount from section 4.3.1, since, you know, my business income is basically my only source of income right now
But when I run the validation, it keeps throwing this error at me
1.1155.2.0.2.5001 - Income Data: The amount in field 5 doesn't match the sum of the individual total incomes (4.1.7., 4.2.3., 4.3.3. (column 7)).
The thing is, I haven't entered any other income anywhere else... and I’ve double-checked that one single business figure about twenty times already—it's definitely typed in correctly.
Does anyone know if there's some weird trick to this? I honestly have no clue where the mistake could be hiding

EDIT: Okay, found it! I had a typo on page 5 that was throwing everything off

Can I still file my DOH forms on paper, or am I stuck using the IRS portal exclusively?
I'm asking because I have some supporting documents I need to include, but I can't find any way to upload a PDF through the IRS site. Under the attached documents section, there's an "Other" option, but clicking it doesn't trigger any upload window. I have no idea what that button is even supposed to do.

neonsurfer13 said:Can I still file my DOH forms on paper, or am I stuck using the IRS portal exclusively?
I'm asking because I have some supporting documents I need to include, but I can't find any way to upload a PDF through the IRS site. Under the attached documents section, there's an "Other" option, but clicking it doesn't trigger any upload window. I have no idea what that button is even supposed to do.

You can attach a mountain of documentation without any issues. In our experience, we’ve had to attach piles of bank statements ourselves. Once you've submitted your DOH, just head over to the "view submitted forms" section and locate the specific filing you just sent. From there, click the little arrow next to it, and you'll see an option labeled "attachments" at the end. Click on that, and you'll find a way to submit whatever files you need at the bottom. So, there's no need to do anything manually; you can handle everything right through the portal.

Brenda Chase3 said:You can attach a mountain of documentation without any issues. In our experience, we’ve had to attach piles of bank statements ourselves. Once you've submitted your DOH, just head over to the "view submitted forms" section and locate the specific filing you just sent. From there, click the little arrow next to it, and you'll see an option labeled "attachments" at the end. Click on that, and you'll find a way to submit whatever files you need at the bottom. So, there's no need to do anything manually; you can handle everything right through the portal.

Alright, thanks for the tip. But just to be clear, I can still mail in a paper copy if I want to?

neonsurfer13 said:Alright, thanks for the tip. But just to be clear, I can still mail in a paper copy if I want to?

Absolutely, you certainly can. We actually just mailed out a package for a small business a few days ago because the taxpayer is located in a different city, and we did the exact same thing last year, so there’s really no issue there. We simply included a note with the supporting documents explaining that everything had already been submitted through the IRS e-file system; however, since the supplemental documentation was so voluminous, we decided to send it all by mail. There were at least 50 different statements to include, and frankly, scanning every single one of them to upload to the portal seemed like a massive headache. Plus, with those strict file size limits—usually capped around 5MB—you'd end up having to send it in a dozen tiny pieces if you went the digital route.

Following a lawsuit, the invoice was settled along with some late interest. I’ve already recorded the invoice in the sales invoice book, but now I'm wondering... should those late interest charges be entered into the sales invoice book as well?
Late interest isn't subject to sales tax, though it does show up under receipts in the KPI.
Since there's no sales tax on them, do I still need to list those collected interest charges in the sales invoice book?
Thanks in advance for the help.

Brandon Jackson4 said:Following a lawsuit, the invoice was settled along with some late interest. I’ve already recorded the invoice in the sales invoice book, but now I'm wondering... should those late interest charges be entered into the sales invoice book as well?
Late interest isn't subject to sales tax, though it does show up under receipts in the KPI.
Since there's no sales tax on them, do I still need to list those collected interest charges in the sales invoice book?
Thanks in advance for the help.

No, don't enter them.

Edward Stewart said:I’ve been pouring over the IRS instructions, and even though this was touched upon earlier in this thread—specifically on page 223—I’m still feeling a bit lost regarding 🤔 where exactly one is supposed to enter the depreciation amount within Part II ("Expenses") of the PPI form.
Item II.9. states that the total expenses are calculated as 1+2+3-7-8. Now, Item II.4. ("write-off rate expenses") seems like the logical place for depreciation, but since it isn't added to the sum, the figure doesn't actually impact the total expenses, which ultimately means it doesn't touch the net income. So, where (and more importantly, why) should the depreciation amount be recorded? Should it go under II.3 ("in-kind expenses") or II.4 ("write-off rate expenses")? (I recall a fellow forum member previously suggesting it belongs in II.4)
I didn't have any depreciation to deal with in previous years, so I never really noticed this quirk, but I seem to remember from a few years back that the breakdown of receipts and expenses was much more intuitive—it showed subtotals alongside depreciation, making the total expense figure, and consequently the final total (income = receipts - expenses), perfectly clear.

Since I’m already burning through my ink 🙂 I have one more question... when entering the depreciation percentage into the DI form on the IRS website, does the number of decimal places matter? (For instance, I have 7 months of a 2-year depreciation cycle, which would work out to 29.16666% of the value). Does that mean next year I'll be entering 29.17 + 50, or just a flat 50% for 2019?

All benefits in kind—including depreciation—fall under "in kind." Depreciation (doubled) also figures into write-off expenses.

The same applies, for example, to tax incentives for purchasing long-term assets. First, it's listed under receipts in kind (receipt for the depreciated amount), and then again under receipts regarding Section 31, Subsection 7.

The reason it isn't summed there is because it's already factored into the components being summed. Honestly, it would probably take an IRS employee an hour of work just to write a coherent explanation under those lines.

Nathan Kelly5 said:No, don't enter them.

google1, thanks for the reply, but I'm a little confused now.
I was reading this 2017 accounting journal about "simple" bookkeeping, and it mentioned something like this:
"The sales journal should include deliveries where an invoice isn't issued, but instead, another document serves the purpose—like interest calculations or specific contracts where no formal invoice is required, etc."
Do you know anything about how that works?

Quick question about partial credit memos.
Last month, I put two items on one invoice because the customer paid for both upfront, but I won't actually ship the second item until this month.
When I finally go to ship that second part, am I supposed to issue a credit memo for just that portion of the bill? Does anyone have a solid example of how to actually pull that off in the system?

Thanks in advance!

I haven't actually dealt with selling long-term assets yet, so I'm wondering if there are any legal hurdles if I decide to sell something for more than its current value listed on the IRS forms?

Hi everyone! I have a quick question regarding electronic invoicing... I’m working over at Silicon Valley, and we don't really bid on massive government tenders; instead, we pick up occasional jobs for a local municipal utility company—they just send us a purchase order when they need something done. So, here is my dilemma: are we legally required to issue an e-invoice for these specific goods and services? I’ve already signed up for the e-invoicing portal (it was an option provided by Silicon Valley, and I have my account set up too, though I personally prefer the e-invoicing platform because it allows for billing per invoice rather than the flat-fee model offered by my account system). Before I registered, my manager assured me there wouldn't be any issues sending e-invoices through the portal even if our partners were only using the my account system—but, as it turns out, there actually *is* a hitch, and the process won't work unless our partners are also registered on the e-invoicing platform... Does anyone have some clever advice on how to handle this? Just to give some context, we are a small business, so we're only looking at about 20 of these invoices total per year. Thanks, everyone!

Hey everyone.

I could use some help with this:
What happens if a client overpaid their invoice back in February?
We bill them monthly for our consulting services...
But now, for the March billing, they’ve paid less by that exact amount.
I'm wondering what I should have actually done with that extra credit in February? Since the next invoice hadn't even been generated yet to offset it...

Thanks.

cosmictinker24 said:Hey everyone.

I could use some help with this:
What happens if a client overpaid their invoice back in February?
We bill them monthly for our consulting services...
But now, for the March billing, they’ve paid less by that exact amount.
I'm wondering what I should have actually done with that extra credit in February? Since the next invoice hadn't even been generated yet to offset it...

Thanks.

The textbook way to handle this would be to issue a deposit invoice—since, effectively, that's what it is—which gives you a credit to apply. This happens quite often, and if a deposit invoice isn't issued, most accountants simply treat the extra funds as a payment applied to the following month. In your specific case, you would just record that difference paid in February as being applied on March 1st.
Strictly speaking, my first suggestion is the most accurate because you would technically owe sales tax on that advance payment as of February.
That said, in everyday practice, most firms don't make a big deal out of using the second method when these things pop up.

Brenda Chase3 said:The textbook way to handle this would be to issue a deposit invoice—since, effectively, that's what it is—which gives you a credit to apply. This happens quite often, and if a deposit invoice isn't issued, most accountants simply treat the extra funds as a payment applied to the following month. In your specific case, you would just record that difference paid in February as being applied on March 1st.
Strictly speaking, my first suggestion is the most accurate because you would technically owe sales tax on that advance payment as of February.
That said, in everyday practice, most firms don't make a big deal out of using the second method when these things pop up.

But what is the rationale behind that? Shouldn't accounting entries serve as a true reflection of the actual business transaction? Why label it an advance if that wasn't the original intent? It seems more logical to treat it for what it truly is: an erroneous payment. Even though several months have passed, shouldn't the correct procedure have been to refund the entire incorrect amount and then have the client resubmit the exact payment required?

Where does the notion come from that a tax liability is triggered simply because someone made a clerical error during a transfer? 😁

Establishing a prepayment requires some form of documentation, such as a formal quote, a pro forma invoice, or a similar instrument, none of which seem to exist here. If I am interpreting the situation correctly, there is merely a service contract for monthly consulting fees. There is no mention of an advance, nor any documented reason to trigger a sales tax assessment. One cannot arbitrarily classify this as an advance for a future invoice if that wasn't the intent and if there is no paper trail to support it.

I am certainly not an expert in this field, so I cannot speak to how these matters are typically smoothed over in the industry, but the current logic appears inconsistent and likely inaccurate.