Accounting for Sole Proprietors: Tax & Bookkeeping Tips

Could someone please clarify something for me: is the income tax and local surtax that a sole proprietor pays based on their assessment from the IRS considered a business expense? Or should I be recording it in my books by entering the amount with a minus sign in front of it? Alternatively, do I skip the bookkeeping entirely and just include it as part of a breakdown of bank account activity when I file my tax return, essentially treating it as something that wasn't included in the business expenses?

briskmason37 said:Could someone please clarify something for me: is the income tax and local surtax that a sole proprietor pays based on their assessment from the IRS considered a business expense? Or should I be recording it in my books by entering the amount with a minus sign in front of it? Alternatively, do I skip the bookkeeping entirely and just include it as part of a breakdown of bank account activity when I file my tax return, essentially treating it as something that wasn't included in the business expenses?

Income tax isn't really a business expense, so you don't book it as one; rather, it's essentially a portion of your total earnings that gets diverted.
At the end of the fiscal year, you file your tax return, and on the penultimate page, you report your total income alongside the various estimated tax payments you made throughout the year—you can just keep your receipts to tally them up or check your digital payment history—which allows you to calculate your final liability for the year.

There's no need to attach extra documentation detailing your bank transactions, since the IRS already has access to your accounts and can see all your income tax and surtax payments on their own records.

ruggedcyclist74, thanks. That’s actually how I’ve been handling it, but I just wanted to double-check if I was on the right track.
🙂
best, 👋

Richard Howard55 said:Just record the invoice and report the sales tax. Exceeding the cash payment limit doesn't suddenly make the receipt invalid, I guess.

Then what's even the point of the limit? It’s still a violation regardless. Better to play it safe than take the risk, right?

Nicole Lee6 said:Quick question regarding the KPI—which specific column are you guys using to report compensations? Also, I’m debating the accounting side of things here: is it technically correct to book compensation as payment in kind? Or should it be logged as a payment through the clearing account, even if the clearing account hasn't actually seen the transaction yet?

In-kind.

How are you guys handling the column entries when closing out open accounts because a small business just liquidated? Are we talking cash, bank transfer, or an in-kind distribution?

It makes zero sense to list cash or wire transfers—those accounts weren't actually paid, they're just being cleared to shut down the entity. Shouldn't it be recorded as an in-kind distribution? Thanks for the help.

One more thing—do you guys actually book bank statements that show up after the closing date? Or do you just write them off entirely?

David Green642 said:How are you guys handling the column entries when closing out open accounts because a small business just liquidated? Are we talking cash, bank transfer, or an in-kind distribution?

It makes zero sense to list cash or wire transfers—those accounts weren't actually paid, they're just being cleared to shut down the entity. Shouldn't it be recorded as an in-kind distribution? Thanks for the help.

Since there's a three-month window for the final sales tax filings during a shutdown (which I assume is why you're grinding through all this right now), I had access to my bank statements even after everything was officially closed. So, I checked to see what had actually been settled via wire transfer; if it was paid, I marked it as a bank transfer, and if it remained unpaid, I listed it as an in-kind settlement. I used the closing date for all of them. I wonder if I should have just labeled everything as in-kind, but honestly, I don't think it's a huge deal since I could still verify the bank activity after the business ceased operations.

David Green642 said:One more thing—do you guys actually book bank statements that show up after the closing date? Or do you just write them off entirely?

Technically, they shouldn't be recorded, which is precisely why everything needs to be finalized by the official closing date. If there are outstanding invoices that were paid, you would settle those against the closing date of the business. The bank account itself can remain open specifically to handle any subsequent payments that you've already accounted for in your previous closing.

Brenda Chase3 said:Since there's a three-month window for the final sales tax filings during a shutdown (which I assume is why you're grinding through all this right now), I had access to my bank statements even after everything was officially closed. So, I checked to see what had actually been settled via wire transfer; if it was paid, I marked it as a bank transfer, and if it remained unpaid, I listed it as an in-kind settlement. I used the closing date for all of them. I wonder if I should have just labeled everything as in-kind, but honestly, I don't think it's a huge deal since I could still verify the bank activity after the business ceased operations.

Makes sense to me. Thanks a lot.

Brenda Chase3 said:Technically, they shouldn't be recorded, which is precisely why everything needs to be finalized by the official closing date. If there are outstanding invoices that were paid, you would settle those against the closing date of the business. The bank account itself can remain open specifically to handle any subsequent payments that you've already accounted for in your previous closing.

And what if there’s an actual deposit or withdrawal showing up on the statements? Do we just ignore those too?

David Green642 said:And what if there’s an actual deposit or withdrawal showing up on the statements? Do we just ignore those too?

I assume we’re talking about expenses like payroll taxes or contributions, because you’ve already accounted for standard business expenses by closing everything out against the final day of operations, just like you did with the revenue from outgoing invoices... Personally, I didn't book those kinds of expenses (like tax contributions) after the official closing date because once the small business is shuttered, it can't legally recognize any further outflows. Anything happening after the closing date simply cannot be attributed to the business's books, since all income and expenses must strictly pertain to the entity itself. It’s much like if a business owner decided to pay off a debt to the IRS a year after their LLC was dissolved... they’re paying it as a private citizen, not through the business, so you don't record it under the company's ledger. Besides, how could they even make a payment through a business checking account after the closing date? They would need a corporate seal, and a seal isn't valid for a defunct entity once the business is closed, so... That’s exactly what the agent at the IRS told me, and honestly, it makes perfect sense.

Brenda Chase3 said:I assume we’re talking about expenses like payroll taxes or contributions, because you’ve already accounted for standard business expenses by closing everything out against the final day of operations, just like you did with the revenue from outgoing invoices... Personally, I didn't book those kinds of expenses (like tax contributions) after the official closing date because once the small business is shuttered, it can't legally recognize any further outflows. Anything happening after the closing date simply cannot be attributed to the business's books, since all income and expenses must strictly pertain to the entity itself. It’s much like if a business owner decided to pay off a debt to the IRS a year after their LLC was dissolved... they’re paying it as a private citizen, not through the business, so you don't record it under the company's ledger. Besides, how could they even make a payment through a business checking account after the closing date? They would need a corporate seal, and a seal isn't valid for a defunct entity once the business is closed, so... That’s exactly what the agent at the IRS told me, and honestly, it makes perfect sense.

He could still pay, because the bank account stayed open. Nobody at the IRS is checking if a seal is technically valid for a transaction like that. He had some late interest penalties on his taxes, but then a refund eventually came through from the government.

Thanks so much for the reply.

On my AT&T mobile bill, part of the charges is listed under pass-through items (it says non-taxable services and pass-through items—I recall there was a one-time parking text alert and some other third-party service fee, but they’ve all been categorized as pass-throughs). Should I bundle these together with the interest and late fees in the "not subject to tax" section when I'm inputting everything into Synesis for the audit? Or am I strictly forbidden from including them anywhere at all?

Nicole Lee6 said:On my AT&T mobile bill, part of the charges is listed under pass-through items (it says non-taxable services and pass-through items—I recall there was a one-time parking text alert and some other third-party service fee, but they’ve all been categorized as pass-throughs). Should I bundle these together with the interest and late fees in the "not subject to tax" section when I'm inputting everything into Synesis for the audit? Or am I strictly forbidden from including them anywhere at all?

P.S. It just occurred to me—when entering mobile service bills into the URA, should that pass-through amount be entered into both the "not subject to tax" section AND the Section 22 field at the same time?

David Green642 said:He could still pay, because the bank account stayed open. Nobody at the IRS is checking if a seal is technically valid for a transaction like that. He had some late interest penalties on his taxes, but then a refund eventually came through from the government.

Thanks so much for the reply.

When I was winding down my small business, I still owed the IRS a bit. I just recorded it as an owner's draw (just the principal) on my final day of operation, and I've been paying it off personally ever since. Any transactions that hit that business account after the official closing date? I didn't log them using the actual bank statement dates; I backdated everything to that final business day.
I kept using the account for a little while longer, but I stopped recording any of those incoming or outgoing transactions in the books.

Hey there...

I’m looking at picking up a little house and flipping it into a small B&B or some kind of hospitality spot. The plan is to handle the purchase agreement, register it under my LLC, and then just write off the depreciation.

The catch is that this place is way out in the middle of nowhere, so I'll definitely need a moving company. Based on that whole "business necessity" logic—blah, blah, blah—can I write off the transport invoice as a business expense? And is it even possible to claim a tax credit on it? Honestly, I don't care much about the sales tax side of things, but I'd love to see it count toward my deductions.

Please let me know, I'm kind of stressing over this. Thanks!

Hey there...

I’m looking into buying a tiny cabin/trailer and flipping it so I can run a little hospitality business out of it. My plan is to handle the purchase, roll it into my LLC, and start writing off the depreciation.

The catch is that this place is a total trek from where I live, so I’ll definitely need a hauling service. Following that whole "everything is connected" logic—blah, blah, blah—can I write off that transport bill as a business expense? And is it even possible to claim a tax credit on it? Honestly, I don't care much about the sales tax side of things, but I'd love to at least sink it into my expenses.

Please let me know, because I am seriously stressing over this. Thanks!

Hey, I'm back. Just getting in from my trip. Small business owners on the flat tax... honestly, what a mess. So, some good people hooked me up and cleared a few things up for me, but I’m still spinning on a couple of bookkeeping questions:

neoneagle10 said:Thinking about starting a sole proprietorship. It’d be field work—basically traveling to wherever my clients are located to get the job done. For payments, I'm planning to just use a simple receipt book for cash from regular people, and then handle the invoicing through my laptop at home for any business clients.

Aside from digging through actual laws and official regulations, this thread is pretty much my go-to source for everything online. Check out this article over on Pokrenipo.It looks like you might have hit send a little too early! I'm ready to go once you drop the text you want me to rework. Just paste it in, and I'll get to work turning it into something fresh, punchy, and totally American. So, I just stumbled upon this article over at Solo.com... honestly? It’s kind of a trip.It’s actually pretty useful too. So, here’s this little guide. So, let's talk about tax reporting, the latest updates, and those maximum expense limits. I’m currently trying to figure out which software I'm going to use for my bookkeeping. Check out this Excel sheet I attached. I can't even begin to explain how much this article on the startup blog hit home. It’s like someone finally put words to all that chaos we deal with every day. Honestly? A total mood.

The bill sequence: I’m honestly kind of lost on how I'm supposed to number these invoices. Any ideas? a) So, I’ve got my setup at my home office, but since I'll be out on the road half the time, I need to keep a running log of everything. Since I'm actually hitting "print" on invoices from my computer back at the base, do I really need to list my main office address as an official place of business in my contract? Or am I good to go just using the home base? b) So, wait—does every single location have its own billing sequence, or is it more like each individual payment terminal keeps its own separate count? Here? I think you might have hit send too early! What's on your mind? Right here. It’s kind of like what @prefiks was asking earlier, but he didn't really get a straight answer out of anyone.

I honestly don't even know where to start with this one. It’s just... wow. I was scrolling through some old threads earlier and realized how much things have shifted lately. Everything feels different now, you know? Like we're all just collectively trying to make sense of a totally new reality while pretending we have it all figured out. Total chaos, but hey, that's life, right? Anyway, I'm curious what you guys think about the whole situation. Is it just me, or is everyone feeling this weird tension? I’m totally lost on how the foundation stuff connects to the account numbers. Like, what's the actual link there? a) So, what exactly is a "base" or a transaction number, and how am I supposed to log these things? Like, what’s the actual order I should be following here? b) So, how do you actually log a baseline entry in the general ledger? It sounds simple enough on paper, but honestly, staring at those spreadsheets can be a total headache if you don't have a system. I can't even begin to process this. Honestly? It’s just... wow. I'm sitting here staring at my screen like, is this actually happening right now? I feel like I need a drink just to wrap my head around the sheer absurdity of it all. Seriously, though, what are we even doing? It feels like we're just spinning our wheels while everyone else is moving forward. Just my two cents, I guess. So, looking at this Excel sheet... every single invoice is listed out individually, even the ones that all went out on the exact same day. Is that actually how you’re supposed to do it? Or should I be totaling everything up for the day and just putting down one line per entry in the sales ledger? I don't have any text to work with! Send over the post you want me to flip, and I'll get to work making it sound like a real person living in the States. Just drop the content here. Since I'm running the KPR digitally, can I just keep adding rows to the spreadsheet, or am I stuck printing out a new page every single time I fill one out?

Any info you guys can throw my way would be a massive help. Seriously, thanks in advance!

amberbadger17 said:Hey there...

I’m looking into buying a tiny cabin/trailer and flipping it so I can run a little hospitality business out of it. My plan is to handle the purchase, roll it into my LLC, and start writing off the depreciation.

The catch is that this place is a total trek from where I live, so I’ll definitely need a hauling service. Following that whole "everything is connected" logic—blah, blah, blah—can I write off that transport bill as a business expense? And is it even possible to claim a tax credit on it? Honestly, I don't care much about the sales tax side of things, but I'd love to at least sink it into my expenses.

Please let me know, because I am seriously stressing over this. Thanks!

The acquisition costs—specifically the transport fees for moving the asset, like the cabin—can be capitalized along with the initial purchase price. This includes any renovation costs, upgrades, and similar expenses.
You should also be able to deduct the sales tax paid on all those mentioned costs.