Accounting for Sole Proprietors: Tax & Bookkeeping Tips

Henry Edwards33 said:That’s a first...

So, by that logic, anything a small business owner pays out of their business account that isn't a direct business expense counts as a draw? Does that mean we need a formal resolution and a ledger entry for every single little thing?

It feels like whoever is interpreting this has completely conflated business draws with personal income.😉

I feel you on that, too. I'll sit down, carefully type out a response, hit send, and then immediately think—man, I bet some new IRS regulation dropped overnight just to make my life harder. 🤣🤣

Timothy Morgan38 said:person, that "informative message" being sent out was actually my doing... because before I stepped in, the system was throwing a restrictive error for these cases and wouldn't let anyone submit the form at all... so I wrote a formal letter to the folks over at the IRS, explained the whole mess, and they finally switched it from a hard block to an informative notice so we could actually file it... so yeah, I'm basically a hero... 😵

Basically, when an asset is fully depreciated, you can successfully submit the form even if it just throws that informative warning...

But if the asset was stolen during the year, you just enter "0" for the remaining life. In that case, it won't trigger any error message at all—it'll just accept whatever you type in... tried and tested!

I don't really follow the part about the disposed asset.
Are you saying we enter the depreciation calculated up to the point of disposal plus the remaining book value in column 8, while setting the book value to zero? And then, presumably, zero for useful life equals a valid form? 🤔

Henry Edwards33 said:That’s a first...

So, by that logic, anything a small business owner pays out of their business account that isn't a direct business expense counts as a draw? Does that mean we need a formal resolution and a ledger entry for every single little thing?

It feels like whoever is interpreting this has completely conflated business draws with personal income.😉

The catch is, that person is an IRS inspector. During our last audit, they demanded a full log of all personal expenses paid via the business account, ATM withdrawals, VAT payments, and records of income tax prepayments. For every single transaction on the account that wasn't logged in the KPI, I had to create a detailed breakdown by date and specific category of non-business expense.
If you haven't been through it, you wouldn't believe me. But if you have, you know exactly what I'm talking about.

Charles Turner13 said:The catch is, that person is an IRS inspector. During our last audit, they demanded a full log of all personal expenses paid via the business account, ATM withdrawals, VAT payments, and records of income tax prepayments. For every single transaction on the account that wasn't logged in the KPI, I had to create a detailed breakdown by date and specific category of non-business expense.
If you haven't been through it, you wouldn't believe me. But if you have, you know exactly what I'm talking about.

Jerks 🤦

I’d probably do the same thing, even though I don't think it's right or something anyone should actually be doing.

But yeah—it's tough when you're left to fend for yourself while everyone else is just coasting.🤣

This is just more proof that we're basically left at the mercy of whoever happens to be running the oversight that day.

Thanks for sharing what happened, even if it's honestly pretty depressing to hear.

When it comes to dealing with cash at small local businesses, I’m big on having some kind of paper trail... you know, keeping track of the money flow. Basically, everything from my daily intake up to my maximum bank deposit goes straight into my checking account. Even when I'm paying out an advance, I insist on getting a receipt that clearly states it’s an advance payment—that way, I don't have to stress about it later. Sure, I pay suppliers in cash, but whenever I go to deposit my earnings, I make sure the deposit matches the total income minus whatever I paid out in cash to specific people. It's how I've always handled things, and honestly, it’s the best way to keep records. Of course, I don't bother keeping a formal petty cash log... I mean, who actually has the patience for that? 🙂)))but nobody ever asked me to
.
As for the whole tax filing headache... well, I actually knocked some of it out today without any drama: 🙂))))....haha, I just submitted the Chamber of Commerce membership form and called it a day. 😉)))

The Form DI triggers an informative alert, but it's regarding items I'm writing off this year where the book value and the write-off amount are identical... which ends up totaling zero. The system won't accept it that way... but I'm assuming it's fine to just send it through like that, right? 😉

Charles Turner13 said:The catch is, that person is an IRS inspector. During our last audit, they demanded a full log of all personal expenses paid via the business account, ATM withdrawals, VAT payments, and records of income tax prepayments. For every single transaction on the account that wasn't logged in the KPI, I had to create a detailed breakdown by date and specific category of non-business expense.
If you haven't been through it, you wouldn't believe me. But if you have, you know exactly what I'm talking about.

That’s why I strictly avoid paying for anything personal through my business account, even though, as a sole proprietor, I technically could. Instead, I just make those tax prepayment withdrawals... nobody ever asks why I took that money, but I keep perfect records for them. This account is strictly for business, which makes it easy to track income and expenses since everything is strictly work-related.

Can someone please walk me through what I should do with the cash left in the register from December 31, 2015? Technically, it’s my opening balance for January 1, 2016, but does that need to be documented somewhere on that dreaded IRS filing form? Things are a complete mess on my end—I had some bills paid during 2015 that I totally overlooked, so I ended up recording them on January 2, 2016. Of course, they show up in the bank statements for 2015, so now I’m worried—is the IRS going to throw the book at me or shut down my business in Brooklyn over this? It's impossible for me to fix the past entries now, because they’re already sitting there in January as income, and naturally, I paid sales tax on them... just a bit late. As for the petty cash, from what I’m reading here, I do keep track of all my deposit and withdrawal slips, but it sounds like I shouldn't have been paying cash bills directly out of the register. That’s what I was doing—it seemed like the most logical move since it's my own money (and honestly, I would’ve gone through so much trouble just to save a few bucks), but apparently, you're supposed to record the entire day's revenue as a deposit first, and then withdraw the specific amount needed for cash expenses... Please correct me if I've misunderstood everything again. My brain is basically mush right now...

So, here’s the plan: I’ll take whatever leftover cash was sitting there from 2015 and dump it all in one go during 2016. I'll just note on the slip that it’s the carryover from last year, then we can slot that amount under the 2.5 PPI when we tackle the 2016 tax filings.

And honestly? I am totally rejecting this whole "cash register" argument. As a small business owner, I *am* the cash register. Period. I swear, if anyone tries to push any other interpretation on me, I’ll just hand them my lawyer's phone number. I’d much rather pay him than deal with some local bureaucrats who wouldn't know hard work if it hit them in the face.

Anyway, sorry for the rant—I know I'm sounding a bit wound up. Long story short, if they come knocking about the register, I'll just whip up a spreadsheet based on the KPI, adjusted for the deposits. But there is zero chance in hell I'm documenting every single inflow and outflow until they actually write it into an official federal regulation or something.

Catch ya later, folks.

Man, everyone’s losing their minds lately. 😢 But hey, I guess we'll figure all this stuff out eventually... just like we always do. Good luck to everyone! 🙂

Keith Martinez5 said:Can someone please walk me through what I should do with the cash left in the register from December 31, 2015? Technically, it’s my opening balance for January 1, 2016, but does that need to be documented somewhere on that dreaded IRS filing form? Things are a complete mess on my end—I had some bills paid during 2015 that I totally overlooked, so I ended up recording them on January 2, 2016. Of course, they show up in the bank statements for 2015, so now I’m worried—is the IRS going to throw the book at me or shut down my business in Brooklyn over this? It's impossible for me to fix the past entries now, because they’re already sitting there in January as income, and naturally, I paid sales tax on them... just a bit late. As for the petty cash, from what I’m reading here, I do keep track of all my deposit and withdrawal slips, but it sounds like I shouldn't have been paying cash bills directly out of the register. That’s what I was doing—it seemed like the most logical move since it's my own money (and honestly, I would’ve gone through so much trouble just to save a few bucks), but apparently, you're supposed to record the entire day's revenue as a deposit first, and then withdraw the specific amount needed for cash expenses... Please correct me if I've misunderstood everything again. My brain is basically mush right now...

The safest bet would be to file an amendment and record those 2015 expenses in 2015. I know, you'd have to file a VAT amendment, but it's better than dealing with a headache down the road.
Maybe I wasn't clear regarding how I handle the cash logs; I don't maintain them like a major corporation would, but I did set up an Excel spreadsheet to track cash inflows and outflows, labeling the columns "deposits" and "withdrawals." Every cash receipt is a deposit, and every cash payout or cash deposit is a withdrawal.
I actually give this spreadsheet to my clients to manage, and they send it back to me at the end of the month for me to double-check.
Some people keep these exact same records in a standard A4 notebook, which is what the IRS suggested in one of their publications when electronic filing was first implemented.
Based on that same spreadsheet, at the end of the year, I total all the deposits and withdrawals to find the cash balance—essentially an overview of unspent and undeposited cash—and then I submit those records to the Police Department along with the HHS. My year-end balance becomes my starting cash balance for the following year.
Everyone has their own workflow, and everyone finds what works best for them.

Keith Martinez5 said:Can someone please walk me through what I should do with the cash left in the register from December 31, 2015? Technically, it’s my opening balance for January 1, 2016, but does that need to be documented somewhere on that dreaded IRS filing form? Things are a complete mess on my end—I had some bills paid during 2015 that I totally overlooked, so I ended up recording them on January 2, 2016. Of course, they show up in the bank statements for 2015, so now I’m worried—is the IRS going to throw the book at me or shut down my business in Brooklyn over this? It's impossible for me to fix the past entries now, because they’re already sitting there in January as income, and naturally, I paid sales tax on them... just a bit late. As for the petty cash, from what I’m reading here, I do keep track of all my deposit and withdrawal slips, but it sounds like I shouldn't have been paying cash bills directly out of the register. That’s what I was doing—it seemed like the most logical move since it's my own money (and honestly, I would’ve gone through so much trouble just to save a few bucks), but apparently, you're supposed to record the entire day's revenue as a deposit first, and then withdraw the specific amount needed for cash expenses... Please correct me if I've misunderstood everything again. My brain is basically mush right now...

Look, let’s be clear about how this works. I deal with cash receipts all the time—for instance, when I’m picking up fuel for my small business, they hand me a receipt made out to the company. Naturally, I’m going to settle that using the petty cash on hand. That is precisely why I maintain a cash fund in the first place. It’s just basic bookkeeping. $1667 You can definitely pay in cash. What I usually do is take that surplus—you know, when you hit that amount over the register limit—and deposit it directly into the petty cash till. That way, if there isn't a specific cash account active that day to absorb the excess, I don't run the risk of it just sitting there or getting mismanaged. Once it's accounted for, I just take the balance down to Chase. $3333 I’ve decided that I’m just going to set my own cash limit for the register and call it a day. Honestly, I'm not dragging all that extra cash down to the bank every single time; it’s just not worth the hassle.

Charles Turner13 says: "I’ve been sitting here staring at this mess for an hour, trying to make sense of it, and frankly, I’m more frustrated than when I started. It feels like every time we think we have a handle on the situation, some new layer of incompetence surfaces. It's exhausting."

amberbadger17 said:So, here’s the plan: I’ll take whatever leftover cash was sitting there from 2015 and dump it all in one go during 2016. I'll just note on the slip that it’s the carryover from last year, then we can slot that amount under the 2.5 PPI when we tackle the 2016 tax filings.

And honestly? I am totally rejecting this whole "cash register" argument. As a small business owner, I *am* the cash register. Period. I swear, if anyone tries to push any other interpretation on me, I’ll just hand them my lawyer's phone number. I’d much rather pay him than deal with some local bureaucrats who wouldn't know hard work if it hit them in the face.

Anyway, sorry for the rant—I know I'm sounding a bit wound up. Long story short, if they come knocking about the register, I'll just whip up a spreadsheet based on the KPI, adjusted for the deposits. But there is zero chance in hell I'm documenting every single inflow and outflow until they actually write it into an official federal regulation or something.

Catch ya later, folks.

I feel like my brain is short-circuiting here; I honestly can't wrap my head around what you just wrote. 🤔 Where exactly are you planning on depositing that amount? If you drop it in all at once like that, it just sits there in the register as my opening balance. As far as I'm concerned, if my opening balance for 2016 matches the closing balance from 2015, everything is squared away. That’s more than enough for me. 🤷

Charles Turner13 said:The safest bet would be to file an amendment and record those 2015 expenses in 2015. I know, you'd have to file a VAT amendment, but it's better than dealing with a headache down the road.
Maybe I wasn't clear regarding how I handle the cash logs; I don't maintain them like a major corporation would, but I did set up an Excel spreadsheet to track cash inflows and outflows, labeling the columns "deposits" and "withdrawals." Every cash receipt is a deposit, and every cash payout or cash deposit is a withdrawal.
I actually give this spreadsheet to my clients to manage, and they send it back to me at the end of the month for me to double-check.
Some people keep these exact same records in a standard A4 notebook, which is what the IRS suggested in one of their publications when electronic filing was first implemented.
Based on that same spreadsheet, at the end of the year, I total all the deposits and withdrawals to find the cash balance—essentially an overview of unspent and undeposited cash—and then I submit those records to the Police Department along with the HHS. My year-end balance becomes my starting cash balance for the following year.
Everyone has their own workflow, and everyone finds what works best for them.

I actually do something pretty similar. I set up an Excel spreadsheet that mirrors our standard cash report—though I just leave out that bottom section regarding the petty cash vouchers 😬. But here’s my headache: I end up manually printing out a receipt for every single deposit or withdrawal 🙂. Does this mean I can just scrap the whole manual receipt process and strictly stick to maintaining the cash report? 🙂

In my experience, I’ve never actually had to submit a final cash balance to the Police Department. They’ve never once asked me for documentation regarding unspent or unfiled cash 🤷. My method is simple: I just take the closing balance from December 31st, 2015, and plug it in as the opening balance for January 1st, 2016. At the bottom of the monthly cash report, right under the total turnover, I have a field for the balance from December 31st, 2015. That figure gets added to the current January activity to give me the balance for January 31st, 2016. Then, that exact amount rolls over directly into the February report, sitting in that same spot under the turnover field 🕺

I’ve seen this happen before where a small business owner doesn't deposit the December cash intake until the start of the new year. Then, once they catch up on all those deposits in the following year, my records end up showing more money deposited than what was actually recorded as cash sales.
If the detectives from the Police Department hadn't called me to demand an explanation, I would have just handed over the cash register logs and called it a day.☕☕

Charles Turner13 said:Yes, you can just deposit the difference, as long as you aren't sitting on an amount of cash that exceeds the legal limit for your register.
The main thing is that you have to maintain accurate records: your deposits must match your sales, your payouts must reflect your cash expenses, and your bank deposits must align with your total turnover.
Just keep in mind that you can only use cash for business expenses up to $1.75.

Since this is a corporation, a standard LLC, does that mean I'm exempt from keeping a petty cash log?

So, I just finished filing my tax return and that infamous Form 1040. My caseworker actually told me they haven't even received the updated software for inputting this specific form yet—he honestly wasn't sure if the system was even functioning correctly or not (though, if you ask me, I’m 100% certain it's a mess)...

Advance payments for dividends are recognized within the period from February 1, 2015, to February 4, 2016.

Does this also apply to sole proprietors when filing with the HHS?
I have received several conflicting answers.🤔
If anyone happens to know, thanks in advance.👍

Charles Turner13 said:The safest bet would be to file an amendment and record those 2015 expenses in 2015. I know, you'd have to file a VAT amendment, but it's better than dealing with a headache down the road.
Maybe I wasn't clear regarding how I handle the cash logs; I don't maintain them like a major corporation would, but I did set up an Excel spreadsheet to track cash inflows and outflows, labeling the columns "deposits" and "withdrawals." Every cash receipt is a deposit, and every cash payout or cash deposit is a withdrawal.
I actually give this spreadsheet to my clients to manage, and they send it back to me at the end of the month for me to double-check.
Some people keep these exact same records in a standard A4 notebook, which is what the IRS suggested in one of their publications when electronic filing was first implemented.
Based on that same spreadsheet, at the end of the year, I total all the deposits and withdrawals to find the cash balance—essentially an overview of unspent and undeposited cash—and then I submit those records to the Police Department along with the HHS. My year-end balance becomes my starting cash balance for the following year.
Everyone has their own workflow, and everyone finds what works best for them.

How exactly am I supposed to handle an amendment? I already filed the sales tax for December 2015 and January 2016, but those specific invoices ended up getting lumped into the January 2016 filing. I’m honestly stumped on what to correct—I’m terrified that if I try to fix it, I’ll just scramble the numbers and make a bigger mess of things.

casualorca5 said:Advance payments for dividends are recognized within the period from February 1, 2015, to February 4, 2016.

Does this also apply to sole proprietors when filing with the HHS?
I have received several conflicting answers.🤔
If anyone happens to know, thanks in advance.👍

That’s a good question.
What I was told is that for sole proprietors, the rules for income tax are the same as they are for employees; basically, whatever was paid from January 1st through December 31st counts as the income tax for that specific year.

Keith Martinez5 said:How exactly am I supposed to handle an amendment? I already filed the sales tax for December 2015 and January 2016, but those specific invoices ended up getting lumped into the January 2016 filing. I’m honestly stumped on what to correct—I’m terrified that if I try to fix it, I’ll just scramble the numbers and make a bigger mess of things.

Just calculate the interest from the date you actually paid until the day you submitted the January sales tax return. At least then you can say you covered the late fees and did your part.

Henry Edwards33 said:Just calculate the interest from the date you actually paid until the day you submitted the January sales tax return. At least then you can say you covered the late fees and did your part.

It’s not that complicated—just roll those expenses into December, file a combined return for December and January, and send it over to the Police Department.👍

Charles Turner13 said:It’s not that complicated—just roll those expenses into December, file a combined return for December and January, and send it over to the Police Department.👍

So, I just submitted my tax return today... does that mean I have to go back in, fix everything, and file a whole new one? Is there still enough time left to get this sorted out before the deadline hits?