Srini Saripalli

Accounting is not for the faint of heart. There are tons of tiny details that you have to consider when setting up your books, or filing your taxes. While there is no substitute for a good accountant, there are certain things that every business owner should have a grasp on. Keep reading to find out about some of the common questions that business owners like you; have when it comes to keeping their books and filing their taxes.

Question #1 What is the difference between Cash and Accrual accounting and why does it matter?

While the concept of cash or accrual based accounting seems pretty straight forward. The confusion comes during tax time. Many businesses will use the accrual method for everyday accounting (which is recommended) and then use the cash based method of accounting when it comes time to file with Uncle Sam. It is important to discuss the implications of this with your accountant. For accounting purposes, the best method for the IT industry is the accrual-based method. Accrual-based accounting recognizes income when goods are shipped or services are rendered. Under the cash method, an expense is recognized when it's paid. Under the accrual method, an expense is recognized when the business is obligated to pay it. So basically, as soon as you fix someone's computer or offer them IT services, you count the income in your books. They may not pay you for 3 months, but you get to claim the income at the time of the service. With cashed based accounting, you only count the money once you have it in your possession.

Question # 2 What can I deduct?

There is a wealth of things that you can deduct for tax purposes, and a good set of books will make the tax process go a lot smoother. The more details that you keep track of in your accounting software, the easier it will be, come tax time. Some of the major ones are:

• Business operating expenses. These are the normal things that you think of when you think deductions. Rent, utilities, cell phone bills, insurance, repairs, improvements and maintenance, supplies, salaries, etc. You may also be able to deduct home office expenses if you work from home.

• Equipment or long term assets. This would include office furniture, computer equipment, buildings, vehicles, and tools. Basically anything that would take more than a year to pay off. You can choose to deduct just the depreciated value or the entire thing in one year- depending on your financial situation.

• Business entertainment. This includes business meetings and lunches, client meetings, and marketing efforts. If it takes place in a restaurant, golf course, or sporting event chances are you can write it off as an entertainment expense. Pay attention though- because there are strict IRS rules surrounding entertainment and you are usually only allowed to deduct half of the total spent in a fiscal year.

• Travel- both local and long-distance. If you send techs out for repairs or onsite consultations, their time and travel expenses are probably deductible. They will need to keep travel logs documenting mileage and time spent on the road, however.

• Health Insurance -- you can even deduct medical things that aren't covered like non-prescription drugs and eyeglasses.

• Wages for Workers or Contract Work- so if you hire a tech at $50,000 a year, you can deduct $50,000 in wages.

• Retirement plans.

• Education and Research- any classes or workshops that help you learn more about the IT field.

• Legal and professional services (tax preparation fee)

Question #3 What triggers an IRS audit?

It is important to note that as a small business owner, you are more susceptible to an IRS audit than the general public. While the exact formula for auditing is unknown, it is said that individuals that file a schedule C are more likely to get audited. This is usually because those that file a schedule C are prone to underreport income and take too many deductions for their income levels.

Other IRS red flags include: • Non-cash charitable deductions

• Large business meal and entertainment deductions

• Excessive business auto usage

• Losses from an activity that could be viewed as a hobby rather than a business

• Large casualty losses

Final Thoughts

Tax time shouldn't be a time to panic! If you keep good records throughout the year, taxes should be a breeze. Hiring a professional to go over your returns with a fine tooth comb is the easiest way to lesson your tax liability and maximize your tax deductions. Make sure to keep your records and all receipts -- so that if the inevitable audit does happen you are protected.