Accounting for Sole Proprietors: Tax & Bookkeeping Tips

I could use some guidance here—I’m currently handling the paperwork for my small business and I'm registered for sales tax.
Last year, I picked up a smartphone for $1198 plus sales tax.
How exactly am I supposed to record this transaction in my KPI—and how does it actually show up on the P-PPI form?
In my KPI, there’s a column labeled "expenses under Section 22, Paragraph 1, Item 5."
Meanwhile, the P-PPI has a section for "non-deductible expenses under Section 33 of the Code."
Thanks.

I’m looking for some guidance regarding section P-PPI under V.2.1. According to the explanation provided in the IRS guidelines, you're supposed to report cash receipts that weren't actually deposited into the business checking account because the owner kept some of that cash on hand to cover various expenses.
However, the actual form itself mentions "Cash Receipts" which were already reported under section II.1.
So, what am I actually supposed to enter here?
Every single cent of our total receipts for 2016 was deposited into our bank account, except for one specific cash receipt from December 31st, 2016, since we didn't keep any leftover cash on hand to pay for upcoming expenses.
Should I just list that specific receipt from December 31st under V.2.1. because it wasn't technically deposited within the 2016 calendar year, or am I meant to put the entire year's total receipts there instead?

Can someone please clear a few things up for me?

1. If someone sends me money but then backs out of a business deal, I just send it back to their account a few days later, labeling it as a mistaken payment or a canceled contract. Same thing happens if I send money and they return it. From what I gather, this doesn't go into the sales tax ledger, but should it be recorded in the internal expense tracking? Is that right, or do you just document those kinds of transactions in a separate memo instead of logging them anywhere?

2. How do I record invoices for services received from the European Union in the sales tax ledger versus the internal expense tracker?
For example, I paid for something via my business checking account $33 (which obviously doesn't include sales tax). For that amount $33, do I enter it in the ledger under both "base amount" and "total amount including tax"? Or do I put the actual amount under "base," calculate what the total would be with tax, and put that figure in the "total amount including tax" field, then just claim the tax credit separately? Both ways end up at the same number eventually, but I want to know which way is actually correct.

And how should that look in the internal expense tracker?

3. I made a mistake entering data into the sales tax ledger earlier this year, which means it was carried over to that period's tax filing. Basically, I accidentally entered the same two incoming invoices twice in the same month (they were from an out-of-state company). I just caught it. How do I fix this mess? Do I need to explain it on my tax return, or more importantly, how do I handle the actual invoices—should I try to offset it in a new tax filing, and if so, how?

Thanks in advance!

Sorry if I’m the only one totally lost here, but I really need to ask. I’ve been digging around but I can't find anyone who's dealt with this exact situation before.
Up until January 31, 2016, I was working for a company, but then I got laid off due to restructuring, and on February 1, 2016, I officially started my own small business.
Now, they’re trying to tell me that on my tax forms, I have to report not just my actual business income starting from February 1st, but also the wages I earned from my old job back in December 2015 and January 2016—even though all the taxes, social security, and withholdings were already handled by my previous employer.
Is that actually how it works? Because honestly, it feels like I'm being taxed twice on the exact same money from my old job.

Also, quick second question: what about interest income from my personal savings account (which I've had for decades)? The bank already automatically handles the taxes on that when they pay out the interest, and it has absolutely nothing to do with my business.
Does that also need to be included on the tax filing? It seems totally ridiculous to me because, again, you'd be taxing money that's already been taxed, plus that interest comes from personal funds that aren't part of my business operations.

Thanks!

Jeremy Booth21 said:Sorry if I’m the only one totally lost here, but I really need to ask. I’ve been digging around but I can't find anyone who's dealt with this exact situation before.
Up until January 31, 2016, I was working for a company, but then I got laid off due to restructuring, and on February 1, 2016, I officially started my own small business.
Now, they’re trying to tell me that on my tax forms, I have to report not just my actual business income starting from February 1st, but also the wages I earned from my old job back in December 2015 and January 2016—even though all the taxes, social security, and withholdings were already handled by my previous employer.
Is that actually how it works? Because honestly, it feels like I'm being taxed twice on the exact same money from my old job.

Also, quick second question: what about interest income from my personal savings account (which I've had for decades)? The bank already automatically handles the taxes on that when they pay out the interest, and it has absolutely nothing to do with my business.
Does that also need to be included on the tax filing? It seems totally ridiculous to me because, again, you'd be taxing money that's already been taxed, plus that interest comes from personal funds that aren't part of my business operations.

Thanks!

Everything goes on the tax return, but you don't get double-taxed.

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Jeremy Booth21 said:Sorry if I’m the only one totally lost here, but I really need to ask. I’ve been digging around but I can't find anyone who's dealt with this exact situation before.
Up until January 31, 2016, I was working for a company, but then I got laid off due to restructuring, and on February 1, 2016, I officially started my own small business.
Now, they’re trying to tell me that on my tax forms, I have to report not just my actual business income starting from February 1st, but also the wages I earned from my old job back in December 2015 and January 2016—even though all the taxes, social security, and withholdings were already handled by my previous employer.
Is that actually how it works? Because honestly, it feels like I'm being taxed twice on the exact same money from my old job.

Also, quick second question: what about interest income from my personal savings account (which I've had for decades)? The bank already automatically handles the taxes on that when they pay out the interest, and it has absolutely nothing to do with my business.
Does that also need to be included on the tax filing? It seems totally ridiculous to me because, again, you'd be taxing money that's already been taxed, plus that interest comes from personal funds that aren't part of my business operations.

Thanks!

You are required to enter the data from your 2016 W-2 provided by your former employer, but please rest assured that you won't be double-taxed since the taxes and withholdings on that portion have already been settled. That is precisely why the tax form includes a specific section where you can list exactly how much tax and withholding was already paid.

As for your private savings, there is no need to include that.

neonsurfer13 As I have previously observed:
I would truly appreciate it if someone could take a moment to clarify a few things for me.

If someone sends me money but then pulls out of a business deal, I typically just wire that amount back to their account after a few days, labeling it either as a mistaken payment or a contract cancellation. It’s the same process if I’m the one who makes a payment and the other party returns the funds to me. From what I gather, these types of reversals shouldn't be recorded in the IRA, but they should be logged in the KPI? Is that the correct way to handle it, or are these transactions supposed to stay off the official books entirely, perhaps just being documented via a separate explanatory memo instead?

How exactly should we be recording invoices for services received from the European Union into the general ledger versus how they should be handled within the ERP system?
For instance, I made a payment using my checking account. $33 (Which, of course, is the pre-tax amount). So, would that figure... $33 I’ve been staring at this tax filing form for a while now, trying to wrap my head around how to input these figures correctly. Specifically, when I'm filling out the section for sales, should I be entering the net amount under "base amount" and then the total including sales tax under "account amount with tax"? Or is the intended workflow to enter the gross amount as the base, manually calculate what the tax would be, and then put that calculated total into the "account amount with tax" field so I can eventually claim the credit? Mathematically, if I'm not mistaken, both methods should ultimately lead to the exact same bottom line. However, I want to make sure I'm following the official IRS guidelines to the letter. Which approach is actually considered the correct way to handle this?

How exactly should that be structured within our key performance indicators?

I made a bit of a mess during my filings earlier this year. I ended up making an error when recording some entries in the system, which means my VAT returns for that period are now inaccurate. Essentially, I accidentally logged the exact same input invoice twice in a single month—it was a bill from an international vendor. I just caught the mistake, and now I’m trying to figure out the best way to clean this up. How should I handle this? Should I include a formal explanation within my tax return, or is there a better way to fix the actual bookkeeping? Specifically, do I need to file an amended VAT return to offset the double entry, and if so, what is the proper procedure to balance everything out?

Thanks in advance!

In that case, we’re looking at transient items. Just draft up a formal explanation for the IRS and include copies of those statements clearly showing the erroneous payment and confirming that it's strictly a refund.

When you're entering this into the system, remember that you need to convert any foreign currency using the Federal Reserve's mid-market exchange rate from the actual date on the invoice. You should enter the base amount—that is, the total before taxes—which will then be categorized as an allowable expense within your KPIs. As for the sales tax, don't include it in the main entry; it’s only recorded in the tax forms as both an input credit and a liability.

You really need to sort this out within the December 2016 sales tax filings, because that final return for the year is specifically intended for correcting any previous errors. My suggestion is to amend that last filing and resubmit it—I’m assuming you’ve already sent it in, given that the deadline was back on January 20, 2016. Once that's done, just give your contact at the IRS a quick heads-up that you've filed an amendment so they can pull the updated version into their system.

Brenda Chase3 said:You are required to enter the data from your 2016 W-2 provided by your former employer, but please rest assured that you won't be double-taxed since the taxes and withholdings on that portion have already been settled. That is precisely why the tax form includes a specific section where you can list exactly how much tax and withholding was already paid.

As for your private savings, there is no need to include that.

That isn't "savings," that falls under "capital gains."

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electricbadger89 said:That isn't "savings," that falls under "capital gains."

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It’s not mandatory—you can do it if you want, but it's totally up to the taxpayer depending on what works best for them...

Nancy Jones said:I’m looking for some guidance regarding section P-PPI under V.2.1. According to the explanation provided in the IRS guidelines, you're supposed to report cash receipts that weren't actually deposited into the business checking account because the owner kept some of that cash on hand to cover various expenses.
However, the actual form itself mentions "Cash Receipts" which were already reported under section II.1.
So, what am I actually supposed to enter here?
Every single cent of our total receipts for 2016 was deposited into our bank account, except for one specific cash receipt from December 31st, 2016, since we didn't keep any leftover cash on hand to pay for upcoming expenses.
Should I just list that specific receipt from December 31st under V.2.1. because it wasn't technically deposited within the 2016 calendar year, or am I meant to put the entire year's total receipts there instead?

Regarding II1, you report the revenue that pertains to 2016 and was deposited during 2016. For example, if your cash receipts totaled $100, but your actual deposits were $80, you would enter $80—essentially just what was actually deposited for that fiscal year.
Section V.2 is meant to show the difference between your total bank turnover and the receipts reported via your bank account, which includes the sum of deposits, loans, and transit items. The IRS has data on exactly how much hit your bank account; you’re reporting a smaller amount through the bank because you recorded a large portion of your income as cash. That is why you report that specific receipt—so they understand how much of the total volume was actually composed of those cash receipts. This is how I’ve always filed, and everything has always been perfectly fine.

Carol Price4 said:It’s not mandatory—you can do it if you want, but it's totally up to the taxpayer depending on what works best for them...

Aha, got it.

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Matthew Bishop4 said:I could use some guidance here—I’m currently handling the paperwork for my small business and I'm registered for sales tax.
Last year, I picked up a smartphone for $1198 plus sales tax.
How exactly am I supposed to record this transaction in my KPI—and how does it actually show up on the P-PPI form?
In my KPI, there’s a column labeled "expenses under Section 22, Paragraph 1, Item 5."
Meanwhile, the P-PPI has a section for "non-deductible expenses under Section 33 of the Code."
Thanks.

Don't record the entire purchase through an input invoice; instead, just record the calculated depreciation as a fringe benefit expense.
Basically, you clear the invoice if it's been paid and claim the sales tax, but you only recognize the actual expense—using the pre-tax amount as the basis for depreciation—in the amount of that year's depreciation. As of December 31, 2016.

Brenda Chase3 said:You are required to enter the data from your 2016 W-2 provided by your former employer, but please rest assured that you won't be double-taxed since the taxes and withholdings on that portion have already been settled. That is precisely why the tax form includes a specific section where you can list exactly how much tax and withholding was already paid.

As for your private savings, there is no need to include that.

Thanks for the reply.

I really need to sit down with my accountant to figure this out because if my salary from my old job was X and I paid Y in taxes, then if I just plug X into this return, it becomes the basis for a 40% tax rate (on top of my actual business income), which would end up being way higher than the Y amount calculated at the 12%, 25%, and 40% tiers.
If that's actually how it works, even with the deduction for taxes already paid (Y), I'd still be paying more tax, which makes zero sense to me.
But hey, like I said, I gotta see how this plays out in the real world. Maybe I'm just overthinking things and talking nonsense.

Thanks again.

I couldn't seem to find a dedicated thread regarding the tax return forms, so since I’m currently navigating this territory myself, I figured I would try my luck here on "home turf" instead 🙂.
Regarding the tax return forms in Excel, specifically section 4.5 (Insurance Income), I've noticed a strange discrepancy: the statement provided by NPR doesn't seem to account for the tax already paid—I entered the amount, but it simply isn't appearing in the 4.5.1 total. Meanwhile, the documentation from HOK calculates it perfectly fine. Naturally, this inconsistency ends up messing with the final calculation on page 9. Which approach is actually the correct one?

Brenda Chase3 said:Don't record the entire purchase through an input invoice; instead, just record the calculated depreciation as a fringe benefit expense.
Basically, you clear the invoice if it's been paid and claim the sales tax, but you only recognize the actual expense—using the pre-tax amount as the basis for depreciation—in the amount of that year's depreciation. As of December 31, 2016.

Thanks for the help.
Just making sure I've got this straight.
For 2016, I should enter the depreciation amount under "in-kind expenses" in the P-PPI, put the older depreciation under "write-off expenses," and then from next year onward, everything goes under write-off expenses.
Thanks.

Brenda Chase3 said:

neonsurfer13 As I have previously observed:
I would truly appreciate it if someone could take a moment to clarify a few things for me.

If someone sends me money but then pulls out of a business deal, I typically just wire that amount back to their account after a few days, labeling it either as a mistaken payment or a contract cancellation. It’s the same process if I’m the one who makes a payment and the other party returns the funds to me. From what I gather, these types of reversals shouldn't be recorded in the IRA, but they should be logged in the KPI? Is that the correct way to handle it, or are these transactions supposed to stay off the official books entirely, perhaps just being documented via a separate explanatory memo instead?

How exactly should we be recording invoices for services received from the European Union into the general ledger versus how they should be handled within the ERP system?
For instance, I made a payment using my checking account. $33 (Which, of course, is the pre-tax amount). So, would that figure... $33 I’ve been staring at this tax filing form for a while now, trying to wrap my head around how to input these figures correctly. Specifically, when I'm filling out the section for sales, should I be entering the net amount under "base amount" and then the total including sales tax under "account amount with tax"? Or is the intended workflow to enter the gross amount as the base, manually calculate what the tax would be, and then put that calculated total into the "account amount with tax" field so I can eventually claim the credit? Mathematically, if I'm not mistaken, both methods should ultimately lead to the exact same bottom line. However, I want to make sure I'm following the official IRS guidelines to the letter. Which approach is actually considered the correct way to handle this?

How exactly should that be structured within our key performance indicators?

I made a bit of a mess during my filings earlier this year. I ended up making an error when recording some entries in the system, which means my VAT returns for that period are now inaccurate. Essentially, I accidentally logged the exact same input invoice twice in a single month—it was a bill from an international vendor. I just caught the mistake, and now I’m trying to figure out the best way to clean this up. How should I handle this? Should I include a formal explanation within my tax return, or is there a better way to fix the actual bookkeeping? Specifically, do I need to file an amended VAT return to offset the double entry, and if so, what is the proper procedure to balance everything out?

Thanks in advance!

In that case, we’re looking at transient items. Just draft up a formal explanation for the IRS and include copies of those statements clearly showing the erroneous payment and confirming that it's strictly a refund.

When you're entering this into the system, remember that you need to convert any foreign currency using the Federal Reserve's mid-market exchange rate from the actual date on the invoice. You should enter the base amount—that is, the total before taxes—which will then be categorized as an allowable expense within your KPIs. As for the sales tax, don't include it in the main entry; it’s only recorded in the tax forms as both an input credit and a liability.

You really need to sort this out within the December 2016 sales tax filings, because that final return for the year is specifically intended for correcting any previous errors. My suggestion is to amend that last filing and resubmit it—I’m assuming you’ve already sent it in, given that the deadline was back on January 20, 2016. Once that's done, just give your contact at the IRS a quick heads-up that you've filed an amendment so they can pull the updated version into their system.

But that December form was probably processed ages ago. You really think I can just go in and change it like that?
And how exactly am I supposed to do that on the form? How do I actually correct the amount? Do I just subtract it from the totals in II1 and III1 (since the invoice is from a company outside the US), or is there some other way to handle it?

I’m running into a bit of a headache with my sales tax filings for February and March of 2016—essentially, looking back at the end of the year, I’ve realized the totals don't match what was actually submitted to the IRS due to some mid-year adjustments. Is it better to just adjust the December filing—either increasing or decreasing the amount—to account for those discrepancies from earlier in the year?

In the past, I would have always filed amended returns for each individual month, which feels like the most precise way to handle it—but let's be honest, when you're dealing with corrections spanning several months, it becomes a massive chore for me and a total nuisance for the agent at the local tax office...

Jeremy Booth21 said:Thanks for the reply.

I really need to sit down with my accountant to figure this out because if my salary from my old job was X and I paid Y in taxes, then if I just plug X into this return, it becomes the basis for a 40% tax rate (on top of my actual business income), which would end up being way higher than the Y amount calculated at the 12%, 25%, and 40% tiers.
If that's actually how it works, even with the deduction for taxes already paid (Y), I'd still be paying more tax, which makes zero sense to me.
But hey, like I said, I gotta see how this plays out in the real world. Maybe I'm just overthinking things and talking nonsense.

Thanks again.

Brenda Chase3 said:Regarding II1, you report the revenue that pertains to 2016 and was deposited during 2016. For example, if your cash receipts totaled $100, but your actual deposits were $80, you would enter $80—essentially just what was actually deposited for that fiscal year.
Section V.2 is meant to show the difference between your total bank turnover and the receipts reported via your bank account, which includes the sum of deposits, loans, and transit items. The IRS has data on exactly how much hit your bank account; you’re reporting a smaller amount through the bank because you recorded a large portion of your income as cash. That is why you report that specific receipt—so they understand how much of the total volume was actually composed of those cash receipts. This is how I’ve always filed, and everything has always been perfectly fine.

Basically, you just put the un-deposited cash in those fields, along with anything else that isn't standard business turnover, like loans or interest... The sum of all items under V + cash turnover + bank turnover = the total transactions processed by the bank during that year (which you can see on your online banking).
That is my understanding of it, and that is how I handle it...

If a small business gets shut down halfway through the year, but the owner actually started a regular W-2 job right after closing up shop—does that mean they still have to include those wages from non-self-employment when filing their tax forms 🤔
?

Jessica Gonzalez30 said:If a small business gets shut down halfway through the year, but the owner actually started a regular W-2 job right after closing up shop—does that mean they still have to include those wages from non-self-employment when filing their tax forms 🤔
?

Yes—the moment you're hit with an obligation to file a return for that tax period, you're on the hook. Even if the business was active for just one single day during the entire year, that obligation remains...