Accounting for Sole Proprietors: Tax & Bookkeeping Tips

graniterider10 said:I’m thinking income tax prepayments don't actually count as business expenses. Am I on the right track here? Is it just the self-employment taxes that go toward my overhead? And for VAT and income tax, am I just supposed to deduct those directly from my checking account?

Exactly, tax prepayments aren't an expense, and neither is sales tax...

ruggedlynx63, thanks for getting back to me🙂

One more thing I need to double-check. When interest gets credited to my checking account, does that count as a receipt? It’s nothing major—just about $2.00—but do I really need to log that in my income and expense ledger? Since it's an incoming transfer to my bank account, I assume I have to list it as a receipt on the PPP form.

graniterider10 said:One more thing I need to double-check. When interest gets credited to my checking account, does that count as a receipt? It’s nothing major—just about $2.00—but do I really need to log that in my income and expense ledger? Since it's an incoming transfer to my bank account, I assume I have to list it as a receipt on the PPP form.

That’s correct, you’ll list it under income.😉

Interest doesn't count toward your receipts anymore—it used to be listed separately under non-operating income, but now there’s just a specific spot on the new form for non-operating receipts...

Before, when dealing with interest or down payments on earned income, I used to put together a separate breakdown for any wire transfers that didn't end up being logged in the main Cash Receipts and Disbursements Ledger. Does this mean I’m supposed to do all of that *only* on this new form now... and still skip entering them in the main ledger? Okay... I guess I totally misunderstood how this works. So, the form has Section II RECEIPTS, specifically item 2. RECEIPTS VIA WIRE TRANSFER... is that where I log those interest payments? And then under Section V SUPPLEMENT TO THE CASH RECEIPTS AND DISBURSEMENTS SUMMARY, item 2. DIFFERENCE BETWEEN BANK STATEMENT TURNOVER AND REPORTED RECEIPTS... do I list those interest amounts there? Also, that discrepancy from the State Employment Agency payment is going to pop up too—should I just mark that as part of that difference?

graniterider10 said:Before, when dealing with interest or down payments on earned income, I used to put together a separate breakdown for any wire transfers that didn't end up being logged in the main Cash Receipts and Disbursements Ledger. Does this mean I’m supposed to do all of that *only* on this new form now... and still skip entering them in the main ledger? Okay... I guess I totally misunderstood how this works. So, the form has Section II RECEIPTS, specifically item 2. RECEIPTS VIA WIRE TRANSFER... is that where I log those interest payments? And then under Section V SUPPLEMENT TO THE CASH RECEIPTS AND DISBURSEMENTS SUMMARY, item 2. DIFFERENCE BETWEEN BANK STATEMENT TURNOVER AND REPORTED RECEIPTS... do I list those interest amounts there? Also, that discrepancy from the State Employment Agency payment is going to pop up too—should I just mark that as part of that difference?

From what I gather, you don't list interest received via bank transfer under II.2 Receipts via Bank Transfer, because then your Section IV TOTAL EARNED INCOME/LOSS won't balance correctly.
The realized income or loss has to match the actual income tax return.

I suspect these interest amounts are only recorded under 2.5 (other unspecified receipts, which aren't considered taxable receipts).
Just my two cents... hoping someone can confirm...

Lada,
I read somewhere you mentioned that interest on checking accounts counts as receipts, which means they’d need to be logged in the MIT.

For years now, following the IRS guidelines, we haven't been logging bank interest as income or receipts for business owners.
We always just listed them as the difference between total bank activity and actual receipts.

Could you let me know if there’s been a change in the rules? I'd love to know where I can find the updated documentation...
Thanks,

Brandon Jackson4 said:Lada,
I read somewhere you mentioned that interest on checking accounts counts as receipts, which means they’d need to be logged in the MIT.

For years now, following the IRS guidelines, we haven't been logging bank interest as income or receipts for business owners.
We always just listed them as the difference between total bank activity and actual receipts.

Could you let me know if there’s been a change in the rules? I'd love to know where I can find the updated documentation...
Thanks,

It’s Article 21, Section 5 of the Income Tax Act.

On top of that, the R&D department released a note that I'll quote here:
"Please note that interest earned on deposits (both demand and term deposits) in checking or foreign currency accounts, paid out by the bank where the business holds its account, is considered part of business receipts."

As of January 1, 2015, the provision in Article 9, Section 1, Item 1 of the Act was removed—it used to say:

(1) The following are not considered income:
1. Interest received from USD or foreign currency savings, or on deposits (demand or term) held in checking, current, or foreign currency accounts earned from banks, savings institutions, or credit unions.

So, there you have it.😉

graniterider10 said:Before, when dealing with interest or down payments on earned income, I used to put together a separate breakdown for any wire transfers that didn't end up being logged in the main Cash Receipts and Disbursements Ledger. Does this mean I’m supposed to do all of that *only* on this new form now... and still skip entering them in the main ledger? Okay... I guess I totally misunderstood how this works. So, the form has Section II RECEIPTS, specifically item 2. RECEIPTS VIA WIRE TRANSFER... is that where I log those interest payments? And then under Section V SUPPLEMENT TO THE CASH RECEIPTS AND DISBURSEMENTS SUMMARY, item 2. DIFFERENCE BETWEEN BANK STATEMENT TURNOVER AND REPORTED RECEIPTS... do I list those interest amounts there? Also, that discrepancy from the State Employment Agency payment is going to pop up too—should I just mark that as part of that difference?

Wait, why would that show up as a discrepancy when you have the corresponding outflow for the payroll taxes that basically offsets those receipts? Unless you aren't recording either one, or maybe you're referring to a surplus that hasn't been applied toward covering future tax obligations yet?

Jessica Gonzalez30 said:It’s Article 21, Section 5 of the Income Tax Act.

On top of that, the R&D department released a note that I'll quote here:
"Please note that interest earned on deposits (both demand and term deposits) in checking or foreign currency accounts, paid out by the bank where the business holds its account, is considered part of business receipts."

As of January 1, 2015, the provision in Article 9, Section 1, Item 1 of the Act was removed—it used to say:

(1) The following are not considered income:
1. Interest received from USD or foreign currency savings, or on deposits (demand or term) held in checking, current, or foreign currency accounts earned from banks, savings institutions, or credit unions.

So, there you have it.😉

Article 20 of the Income Tax Act

(6) Business income also includes interest received under Article 30 if it comes from financial transactions that fall under the taxpayer's core business operations.

Article 30

(15) Regarding the interest mentioned in paragraphs 1 and 3, the following are not considered:

3. Interest earned on positive balances in checking, current, or foreign currency accounts provided by banks, savings institutions, or other financial entities—but only up to the maximum amount paid for liquid savings. This exemption applies if the interest on liquid savings is lower than the minimum rate for fixed-term deposits—basically, if it doesn't exceed 0.5% annually.

Carol Price4 said:Article 20 of the Income Tax Act

(6) Business income also includes interest received under Article 30 if it comes from financial transactions that fall under the taxpayer's core business operations.

Article 30

(15) Regarding the interest mentioned in paragraphs 1 and 3, the following are not considered:

3. Interest earned on positive balances in checking, current, or foreign currency accounts provided by banks, savings institutions, or other financial entities—but only up to the maximum amount paid for liquid savings. This exemption applies if the interest on liquid savings is lower than the minimum rate for fixed-term deposits—basically, if it doesn't exceed 0.5% annually.

Well, Section 30 covers income from capital and how that gets taxed when it's paid out.

Section 20, paragraph 5—if you look closely—clarifies that interest collected on funds or placements used for business operations counts as business receipts, unless those amounts are already subject to withholding tax under Section 30. So, basically, any interest up to 0.50% isn't classified as capital income and isn't hit with withholding, but it *is* still a business receipt.

Anything over 0.5% is subject to withholding, but it wouldn't count as business income because we wouldn't want it getting taxed twice, right? 😉

So, interest earned on the checking account goes straight into the MIT... it counts as receipts, and on the P-PPI form, we list them under "receipts via bank account":

Basically, they bump up our total income, which means we end up paying more under the Income Tax Act.

Just one more thing: I have a client who paid late, so they included some interest for the delay.

I didn't record those interest charges in my Sales Journal—I just logged the actual invoice itself.
Should those late fees be recorded as a receipt in the MIT?

Thanks,

Jessica Gonzalez30 said:Well, Section 30 covers income from capital and how that gets taxed when it's paid out.

Section 20, paragraph 5—if you look closely—clarifies that interest collected on funds or placements used for business operations counts as business receipts, unless those amounts are already subject to withholding tax under Section 30. So, basically, any interest up to 0.50% isn't classified as capital income and isn't hit with withholding, but it *is* still a business receipt.

Anything over 0.5% is subject to withholding, but it wouldn't count as business income because we wouldn't want it getting taxed twice, right? 😉

I’d honestly go looking for an official ruling on this one. Look, Section 20 says business receipts come from the types of income listed in Section 30, but then Section 30 itself says that credit interest on a checking account isn't actually "interest"... and it's never been treated as a business receipt before.

I don't mean to be difficult here—it's not a huge deal—but the wording just feels super blurry to me. Plus, why even mention receipts in a section that focuses on expenses? It's not even explicitly stated in Section 20...

Carol Price4 said:I’d honestly go looking for an official ruling on this one. Look, Section 20 says business receipts come from the types of income listed in Section 30, but then Section 30 itself says that credit interest on a checking account isn't actually "interest"... and it's never been treated as a business receipt before.

I don't mean to be difficult here—it's not a huge deal—but the wording just feels super blurry to me. Plus, why even mention receipts in a section that focuses on expenses? It's not even explicitly stated in Section 20...

If I were you, I’d start by waiting for them to actually write the laws properly according to the Fall Law.
Because, man, God help any country where you have to interpret one single sentence of a law by cross-referencing five other different sections. As if adding a bunch of extra IRS regulations wouldn't make things just a little more "fun" for us.

Since it isn't specifically laid out in Section 20, paragraph 6...
Honestly, for just a few bucks, I wouldn't even bother stressing over it.
Besides, why wait for their official stance when we can usually figure out the answer ourselves during a debate right here? It would take us days to get a response from them anyway. 👏👏 That’s why I love reading the quotes on this forum—you end up learning so much just by following the discussions. 👏

And keep an eye on Section 30. You really need to look at it strictly from the perspective of capital gains taxation.

Jessica Gonzalez30 and Carol Price4,

I'm looking into interest paid into my account during 2015.

I noticed the Income Tax Act went into effect on January 1st, 2016.

How did you all handle things back in 2015... did you include those amounts in your MIT or not?

Thanks

Brandon Jackson4 said:So, interest earned on the checking account goes straight into the MIT... it counts as receipts, and on the P-PPI form, we list them under "receipts via bank account":

Basically, they bump up our total income, which means we end up paying more under the Income Tax Act.

Just one more thing: I have a client who paid late, so they included some interest for the delay.

I didn't record those interest charges in my Sales Journal—I just logged the actual invoice itself.
Should those late fees be recorded as a receipt in the MIT?

Thanks,

Well, look at you...
You'd actually make a profit there instead of just handing it all over to the IRS.
Come on now, 🤣

Brandon Jackson4 said:Jessica Gonzalez30 and Carol Price4,

I'm looking into interest paid into my account during 2015.

I noticed the Income Tax Act went into effect on January 1st, 2016.

How did you all handle things back in 2015... did you include those amounts in your MIT or not?

Thanks

The section we're quoting here refers to the law that has actually been in effect since January 1st, 2015.

Jessica Gonzalez30 said:The section we're quoting here refers to the law that has actually been in effect since January 1st, 2015.

Jessica Gonzalez30, thanks so much.

Brandon Jackson4 said:Jessica Gonzalez30, thanks so much.

So, what’s the bottom line here? What are we actually looking at?
Are those passive interest payments getting rolled into income for 2015?