Episode 39
It’s the middle of July as I am writing and recording this, and I am finally more relaxed after catching up on most of the things that I didn’t have the bandwidth to do during tax season and May and June. And it’s time for me to reflect on the interesting situations that I’ve run into in the past many months. And if it’s time for me, it's time for you, too. I’m ‘getting ready for vacation’ – Paul Rosenblum.
Before I start, let me thank you for using the new text feature, but remember, it’s one way, so when you text me, please include an email address so that I can get back to you. If you go to the website at bookkeepermensch.com there’s a link to email and even voicemail--both allow me to get back to you. And remember to check out the YouTube channel!
In the last two episodes (#37 and #38), I spoke of ‘personality’ in the business. I’ve also spoken about matching the tax preparer’s personality and specialty to your business. Gather ‘round and let me tell you some stories and possible outcomes if you don’t match up your tax preparer and your bookkeeper to the kind of business you have.
I have a current client who started their business in 2018. It was a one-person business that had to do with the environment. The company installed green energy tools such as lighting and solar panels. The tax preparer suggested (or maybe told the owner – I wasn’t there) to create an S Corporation. They did and went on their way. I am not sure of the number exactly, but there were several bookkeepers and more than 2 tax preparers in the 4 years until I inherited the books. And believe me, they were a mess. The chart of accounts needed fixing, the transactions were in the incorrect categories, and bank accounts were reconciled, but with adjustments almost every month because whoever was reconciling, probably couldn’t find the discrepancy and gave up and let the software adjust and balance the books. I worked it into my schedule, and I knew it would take me months if not a year to fix things, given all the other companies that I have to work on. I worked on it, and worked on it, and worked on it. It seemed like every time I went into the books, I found something else that needed fixing.
There were personal credit cards that the owner was sharing with a family member, and not connected to QuickBooks to be downloaded, and it took literally MONTHS for me to get a year and a half of 7 or 8 credit card statements that the company was using, The company spent a lot of money on products and equipment and services that they knew were going to be paid back to them by a state rebate program. But when? It ended up that it took over a year to get rebate checks, so we are looking at hundreds of thousands of dollars that the company was laying out for their clients. So, they took out a loan from a local lender (not a bank, but a non-profit organization who specializes in this kind of funding), and they knew that any money that was funded was eventually going to be paid back to the organization after the rebate checks came in. It’s complicated accounting because the invoice date has to be correct, and every phase of the project should be tracked within the accounting system in some way. Pretty recently, the company finally got the rebate checks.
So, the next conversation that I had with the owner of the company was this: Which invoice(s) does this large rebate payment get applied to? We went over one large invoice that happened to be the same exact amount. The invoice was dated 2022. The rebate came in 2024.
But this is not where it ends. The IRS says that a customer ‘Invoice’ (this company does accrual accounting which makes it even tricker) – is a legal invoice only after a project or a phase of a project is finished and done. And not before. If the project has 3 phases, then an estimate should be made for the entire project, and as each phase finishes and is signed off on, then a part of that large estimate can then be converted to a customer invoice. In accounting software, estimates do not post to revenue,(they are non- posting transactions) only invoices (and bank deposits without invoices do, but that’s another story).
In this case, however, it appeared that the customer invoice was created when the job started. And I am waiting to hear back from the tax preparer if that invoice was counted in 2022 in the accrual-based tax return. If it was, then two problems. #1 – that was incorrect since the job wasn’t completed and no invoice should have been created (but the tax preparer couldn’t know that), and #2 – that particular year, the company declared a loss because of all of the COGS that had to purchased with the loan money. So, a very large invoice was wasted on a tax return that shouldn’t even have been included in the first place. And this wasn’t the only mis-labeled and mis-dated customer invoice in the system.
Bad things happened here. First, the tax preparer created an S Corporation for a single owner, which is inherently more complicated accounting-wise because of owner payroll and K1’s and of course a higher amount of money that has to be paid to the tax preparer because of the corporate tax return and the personal tax return. Secondly, even though the bookkeeper set up the individual cost of goods items that appeared on customer invoices and outgoing bills correctly, they did not date invoices correctly, and didn’t use estimates. At the writing of this episode, I haven’t looked to see if bills were misdated as well. Purchase orders, yes, but not estimates. Hint – whenever you have estimates, purchase orders, and customer invoices through a long project, you need a dedicated person at least 3 to 5 hours a day 2 or 3 days a week to do that very careful input into the accounting system. Not an owner and a non-bookkeeper who is just doing the data entry. I’ll come back to it again – that word. Yes, you got it. ‘Personality’. In this case, hiring the right, competent people from the very beginning. And now, since it falls in my lap, I have a client who is very upset when I tell them the things that I am uncovering and how it could affect their taxes, because the company shows a large profit this year, hence a lot of taxes owed. And then my shoulder becomes something that owners cry on, at least over the phone or on zoom. I know, I put myself in this position, rather than just continuing with the books and not questioning what I find. But I’m not wired to knowingly do something wrong in accounting. I’m not perfect, but I never do any accounting that I know is incorrect and just don’t care about it.
Making informed decisions -- from the very beginning. From Startup expenses to the last day the company is in existence. And every day in between. Not just decisions about hiring employees or subcontractors, not just decisions about how to sell or what to sell, or where to sell, but decisions about what kind of entity makes the most sense for your company at the time that you start it, should you be on a cash based or accrual based system (because that’s hard to change once you decide), and what bookkeeper and data entry people who you hire as your business grows. Understanding that if you have an S corporation (or a C Corporation for that matter), that you should not use personal credit cards – you should always use corporate credit cards in the corporation’s name. By the way, one reason to make sure going into any business that your personal credit rating is good since that will be checked if you have a new corporation with no credit rating of its own. (The same with LLC’s, by the way, but not with sole proprietorships) I talk about different entities in episode 2 and accrual and cash-based systems in episode 4.
This is one of the reasons for this podcast. There are lots of courses on business in colleges, as I have discussed, but these kinds of things, to my knowledge, are not talked about. And that kind of irks me. But again, as usual, I digress.
I’ve also worked with partnership LLC’s. Almost every time, the set of partners put themselves on payroll from the very beginning. With a partnership LLC, the partners or owners cannot be on payroll. They either have to get distributions, or ‘Guaranteed Payments’ if they work there. So, payrolls had to get backed out of, and the bookkeeping needed to be adjusted. One of the partnerships that I work with wants their ‘Guaranteed Payments’ going to their individual LLC’s, even though we book them as ‘Guaranteed Payments’. This is ok since we are booking them correctly in the system. It would have been nice if the partners either asked me or their tax preparer before making decisions on their own. Oh, well, you can have a podcast that I love creating, but you can’t have everything you want in life.
Another set of partners started their partnership about 10 years ago and took out a very large loan to do the buildout. When the time came for the building inspections and the fire code inspections and all the other things that they had to pass before they were allowed to open, they didn’t realize that almost nobody passes the inspection in NYC on the first try. So, they ended up opening 2 months later than they had planned, so they were already behind financially the day they opened because of the schedule. Between the two of them, they maxed out 7 or 8 credit cards, owed $80 or $90 thousand dollars and started paying minimum payments on all the credit cards. They needed audio equipment that they purchased 4 or 5 times, because they finally found out years later that they purchased the wrong equipment which is why they kept on blowing full audio systems. They then decided to add a roof (or better yet, a special style tent) to the second floor to get more people into their establishment to make more money in winter months, but failed to realize that there will be repairs and maintenance, adjustments to the tent and the heating, and higher interest on all of their credit cards since the cost of the tent roof was paid for on credit. If anyone needed a business coach it was them! But nope – they wanted to do it all themselves. They are now closing since they ran out of lenders to borrow from after all of these years. Even though I talked to the partners to give them suggestions which they never really listened to or gave me excuses on why my suggestions wouldn’t work, I’m still very upset that they didn’t take any advice from anyone, not just me. Running a business is hard. Much harder than people think, especially the behind-the-scenes accounting and the financial decisions that come with it.
Another client started their own S Corporation 3 years ago, for a service, and used a personal credit card mixed with personal and business expenses. The owner came to me, I suggested a new tax preparer, and we straightened out that problem. A personal credit card for personal expenses, and a business credit card for business expenses. Easy Peasy. And that started on Jan. 1st, 2024.
I could go on, but you get the picture. Good decisions for your company have to start even before you actually HAVE a company. That’s another part of the ‘personality’ of a company. Making decisions slowly, with thought and knowledge even if you have to ask someone else (like me, even though I don’t know everything, by far).
I am recording this right before vacation, so I promise the next episode will be less ranty. Let me know what YOU would like me to talk about, since when I get back from vacation, my brain might still be in the ‘off position’ for a little while.
By the time this episode is live, I’ll be back from vacation, so I’m here to receive your email, voicemail and text messages.
August in NY – I’ll be in my overly-air-conditioned office still catching up and preparing for the beginning of the mini onslaught right after Labor Day -- I’m (back to work) Paul Rosenblum.
