Small Business Accounting Basics

Small Business Accounting Basics

Operating your own small business and being your own boss comes with many benefits but also brings new responsibilities. One of the biggest burdens of being a small business owner is handling the accounting. This includes keeping a record of all income and expenses and accurately reporting your business financials when tax season rolls around.

This article covers the basics of how small businesses can set up an accounting system and manage their bookkeeping effectively.

What Is Small Business Accounting?

Small business accounting includes the process of tracking, recording, and analyzing your business’s financial transactions, including purchases, sales, expenses, payroll, and more. These numbers translate into a statement that provides a picture of your business’s profitability.

In short, small business accounting tracks the money that flows in and out of your business accounts and boils down to:

  • Bookkeeping (recording financial transactions)
  • Creating financial reports
  • Filing tax returns

Accounting also helps you determine the health and value of your company so you can adjust accordingly for short- and long-term success.

Below are some basic steps to help you to set up an effective accounting system for your small business.

Open a Business Bank Account

Once you’ve legally registered your business, you’ll need to have a separate bank account to cover all your business transactions. Not only does this make life easier come tax time, but it also protects your personal assets in the case of bankruptcy, lawsuits, or audits. Additionally, having a business bank account with detailed financial records can help you obtain funding from creditors or investors down the road.

Note that Oregon LLCs and sole proprietors don’t legally need to have a separate bank account, but it is highly recommended.

Start by opening a business checking account. It’s also a good idea to have a business savings account, which can help you organize funds and plan for taxes. For instance, if you automatically put a percentage of your business income into a savings account, you’ll have money set aside for your estimated taxes due each quarter. A good rule of thumb is to put aside 25% of your income, or perhaps more if you’re a high earner.

To open a business bank account, you’ll need a business name, and your business might have to be state-registered. Check with the individual bank on its requirements.

Consider a Business Credit Card

Having a business credit card can help build your company’s credit rating. And if you choose a card with benefits, you can earn cash-back rebates or travel points with your purchases.

Track Expenses

Accurate expense tracking is essential for monitoring business growth, developing financial statements, keeping track of deductible expenses, and preparing tax returns.

From the very beginning, your business needs to establish accounting methods for organizing receipts and other important records, which can be done manually or using accounting software.

What Expenses Do Small Businesses Need to Track?

The IRS requires that you keep documentation that proves income, credits, and deductions shown on your tax return. Although the records and receipts you need to save will depend on the nature of your business, generally you’ll want to keep the following:

  • Receipts
  • Bank and credit card statements
  • Bills
  • Canceled checks
  • Invoices
  • Proof of payments
  • Financial statements
  • Previous tax returns
  • W2 and 1099 forms
  • Any other documentation that supports an item of income, deduction, or credit shown on your tax return

The IRS does not require receipts for certain expenses under $75. You can keep digital or paper copies of receipts, and there are many apps and online storage services that make it incredibly easy to scan, organize, and store all your receipts.

Below are the types of business expenses you need to keep a record of:

  • Meals and entertainment
  • Out-of-town business travel
  • Auto-related expenses
  • Receipts for gifts
  • Home office receipts

Operating your business from your home helps keep overhead low and allows you to qualify for more tax deductions. The IRS allows you to deduct the portion of your home that’s used for business, as well as your internet and cell phone service, and transportation to and from work sites.

Any expense that’s for both business and personal use must reflect its mixed use. For instance, if you use one phone for both, you can deduct the percentage you use the device solely for business. Gas mileage costs are 100% deductible, so be sure to hold onto all records and keep a log of your business miles.

Develop a Bookkeeping System

Bookkeeping is the accounting process of recording transactions, categorizing them, and reconciling bank statements.
Accounting is the high-level process that provides an overview of your business progress and makes sense of the data compiled in your bookkeeping.

As a small business owner, you’ll need to determine how you want to manage your books:

  • You can use software like QuickBooks online or use a simple Excel spreadsheet.
  • You can outsource a part-time bookkeeper, one that’s local or cloud-based.
  • When your business grows, you can hire an in-house bookkeeper or accountant.

You also need to determine whether to use the cash or accrual accounting methods. These are the differences between the two:

  • Cash method. Revenues and expenses are recognized when they are actually received or paid.
  • Accrual method. Revenues and expenses are recognized when the transaction occurs (even if the cash hasn’t been paid or received yet), so it requires tracking accounts receivable and accounts payable.

U.S. business owners can use cash-based accounting if revenues are less than $5 million. Otherwise, the accrual method must be used.

Determine How You’ll Get Paid

Most business transactions these days are not done in cash. Therefore, you’ll need to decide on a payment solution that works best for your business. This will come down to whether you accept payments in person, through a point of sale (POS) system, or online.

  • POS system and in-person payments. If you accept both, consider getting a mobile credit card reader like Square. This is great for businesses that don’t expect to process a high volume of in-person purchases daily.
  • POS payments only. If you perform only POS sales, you can use a POS system that works with a cash register or just a credit card reader independent of any cash collection system. For the in-person payment methods—POS systems or credit card readers—you need to have a merchant account with your bank. This account acts as an intermediary between the payment system and your bank account to withdraw and deposit funds.
  • Online payments only. If you accept only online payments, PayPal and Shopify are two popular platforms for online retailers.

Set Up a Payroll System

When it makes sense for your small business to hire more help, you’ll need to determine whether you hire an employee or an independent contractor.

If you have employees, you’ll have to set up a payroll schedule and make sure you’re withholding the correct taxes. There are many services available to help with this, and if you use accounting software, many offer a payroll feature.

If you hire independent contractors, keep track of your payments to them, as you’ll be required to file a 1099 form for each contractor at the end of the year.

Tax Filing Obligations

The legal structure of your business determines your business’s tax obligations. If you’re a sole proprietor or your business is registered as an LLC or partnership, you’ll likely claim business income on your personal tax return. If you run a corporation, it’s considered a separate tax entity, and the income you receive from the corporation will be taxed independently, as though you were an employee.

Self-employed individuals need to withhold income tax the same way an employer withholds taxes from an employee’s paycheck. If you owe more than $1,000 in taxes for the year, you will need to pay quarterly estimated taxes four times a year.

When tax season comes around, technology is your friend! Understanding what business expenses you can deduct and using technology to track them will help to ensure you don’t pay more than you owe.

Be sure to have a program intended for business purposes, like QuickBooks, Sage, or Great Plains. While there are many “free” programs out there to track mileage and expenses, “Free is not free” when your data is lost!

Consider software that can help track:

  • Mileage
  • Travel and meal expenses
  • Personal use of a dedicated home office space
  • Receipts
  • Time

If your needs are more comprehensive, the Oregon SBDC Network provides classes on small business accounting, budgeting, cash flow management, and QuickBooks—one of the most extensive financial reporting and management programs on the market for small business accounting purposes.

If you’re new to QuickBooks, you can learn how to set up new customer and vendor accounts, create invoices, record sales, and enter payments. If you are already using the basic features of QuickBooks but want to master its other offerings, advanced classes are offered throughout the state.

QuickBooks training is available through your local Small Business Development Center and taught by experienced professionals who understand the software inside and out. To find a QuickBooks or small business accounting class near you, contact your local Center today.

Here’s Your Business Tax Preparation Checklist

Everything You Need to Know to Maximize Business Tax Deductions

Business tax preparation can seem daunting, especially for small-business owners filing for the first time. To ensure that you’re ready when tax time comes, start early! Follow this checklist to prepare for your small-business taxes and know how to maximize your business tax deductions.

If you need further guidance on current and future business tax preparation, check out the Oregon Small Business Development Center’s resources at the end of this guide.

Business Tax Preparation Checklist

Know the types of taxes applicable to your business.
Choose the forms you’ll need.
Collect the necessary financial documents.
Understand tax deductions and tax credits.
Get your 1099s in order by collecting W-9s now.
Look at I-9s for expiring documents and request new ones at least two months in advance—plus, be sure to sign the renewal section.
Request new W-4s (state and federal) from employees.
Review your loan, credit card, and accounts payable balances, and check that they match the balance sheet.
Review your profit and loss and consider tax-saving strategies.
Check in with your tax preparer, or select a tax preparer accountant now.
Request a tax-filing extension well before your filing deadline.

Know the Types of Taxes Applicable to Your Business

There are various types of taxes that Oregon small-business owners are required to pay to the IRS and state tax authorities. The six main types of taxes your business may be responsible for include:

  1. Income tax: Taxes paid on the profits of the business (individual/self-employment and corporate). The Corporate Activity Tax (CAT) applies to businesses that earn $750,000 in gross income or more in a year.
  2. Estimated taxes: Quarterly tax payments, if you are a sole proprietor/sole member limited liability company (LLC) filing a Schedule C, Schedule E, Schedule F, or Form 1065 as a partnership/ multi-member LLC partnership return for your business. If you are a Sub S, be sure to consult your tax professional for your specific election and filing requirements.
  3. Self-employment tax: Social Security and Medicare for self-employed earnings.
  4. Employment taxes: Social Security, Medicare, federal and state unemployment taxes, and Workers’ Benefit Fund (Forms 941, 940/ Form OQ, Oregon Schedule B, Form 132, Form QA).
  5. Business personal property taxes: Filed by each individual, partnership, firm, or corporation, this tax varies based on your locality. Taxable property includes items such as machinery, equipment, and furniture used previously or presently in a business.
  6. Excise tax: Depending on your business structure, you may be assessed an excise tax. Corporate excise taxes are typically imposed only on a small business set up as a C corporation or LLC that elects to be treated as a corporation; this is an additional tax charged on goods and services. For S corporations and LLCs, a minimum excise tax is typically assessed, and the business owner pays personal income tax on the income that passes through from the business. Also, if employees work in the TriMet or Lane Transit Districts, an excise tax will be due.

Be sure to consult with your tax preparer to ensure that you meet all your tax obligations.

Choose the Forms You’ll Need

Once you understand the types of business taxes that are assessed, it’s time to choose the forms you’ll need.

The most common tax forms small businesses need include:

  • Schedule C: For sole proprietors and sole-member LLC owners, this form is attached to your personal income tax return.
  • Schedule E: Used by landlords and property owners to report business income and expenses on their properties.
    Schedule F: Used by farmers/ranchers and others with agricultural businesses.
  • 1099-MISC: Used to report other income or rent paid to a landlord.
  • 1099-NEC: Used to report payments to individuals and businesses for amounts equal to or more than $600 in the year (services and goods).
  • Form 1120: Used to report income from a C corporation.
  • Form 1120S: Used for companies with S corporation status, this form should be filed separately from your personal income tax return.
  • Schedule K-1: Prepared for each individual partner in a partnership, to be included with their personal tax return.

If you are unsure which tax forms you need, be sure to consult with your tax preparer.

Collect the Necessary Financial Documents

Among the most important steps of business tax preparation is collecting pertinent financial information for your taxes. Having the following essential documents readily available will help to make filing your taxes less time-consuming:

General information:

  • Federal tax ID number, also known as an EIN
  • Business Registry Number for Oregon
  • Social Security number
  • NAICS Code for your business
  • Previous year’s tax return

Business documentation:

  • Income statement (be sure to provide information either as cash-based or accrual)
  • Balance sheet (be sure to provide information either as cash-based or accrual)
  • Transactional supporting documents, such as bank and credit card statements, invoices received and paid, and bank deposit slips
  • Accounting documents
  • Asset purchase information, including the sale of facilities, vehicles, equipment, and stock or inventory
  • Sale of assets (provide the date of sale and net book value to determine gain or loss)
  • Depreciation schedule of assets
  • Mileage log for each vehicle
  • A statement on capitalization criteria for assets
  • Information on any fringe benefits paid to employees

Employment and vendor tax documentation:

  • Employee forms: W-9, I-9, W-2
  • Subcontractor forms: 1099, 1099-MISC, 1099-NEC
  • Payroll documents

Home office documentation:

For business owners who use part of their home for business purposes, expenses may be deductible for the business use of your home. Document the square footage of your home office and the total square footage of your home, as well as how much you paid for mortgage interest or rent; utilities; homeowners or renters insurance; property taxes; repairs to the home; and any separate phone line you maintain. Also, if you use the internet and/or cable, such as for watching YouTube videos or to communicate with customers, include this with your home office documentation.

Understand Tax Deductions and Tax Credits

As a small-business owner, you have access to advantageous tax deductions and tax credits to reduce how much you owe, but you will need to prove that you qualify for them.

A tax deduction reduces a business’s taxable income, while a tax credit reduces the business’s tax bill.

Some of the deductions that small-business owners may qualify for include:

  • Supplies
  • Professional fees, such as attorneys, accountants, and bookkeepers
  • Operational costs, such as rent and utilities
  • Home office expenses (not deducted directly on the P&L; done on your tax return only)
  • Marketing costs to promote your business
  • Entertainment and travel expenses
  • Mileage
  • Healthcare and employee benefit expenses
  • Company vehicle insurance
  • Asset depreciation
  • Loan amortization of points
  • Goodwill deduction, if you purchased the business
  • Employee salaries and benefits
  • Training and education expenses
  • Qualified business income (QBI) deduction, up to 20% reduction in net income

Tax credits are awarded to businesses that engage in a particular type of business action that is helpful to the economy or society. Some common small-business tax credits include:

  • Small-business health insurance premiums, for businesses with fewer than 25 employees
  • Employer credit for Paid Family and Medical Leave
  • Investment credit for qualifying environmental and energy projects
  • Disabled access credit, for expenses to make your business more accessible to those with disabilities
  • Work Opportunity Tax Credit, applying to businesses that hire employees from underserved populations, such as veterans, ex-felons, or recipients of family assistance or food stamps, among others
  • Alternative motor vehicle credit, for electric and hybrid vehicles used for business purposes
  • Information on all grants, PPPs and other incentives provided during COVID

Get Your 1099s in Order

You may have incoming or outgoing 1099 forms for your business, and it’s a good idea to get these in order in advance.

If your small business works with independent contractors, you must file Form 1099-NEC for each non-employee whom you have paid at least $600 for services performed. If the independent contractor also provided supplies/materials/goods to your business, those are included on the 1099-NEC. In cases where the amount you paid is below $600, you will not need to file a form. Be sure to collect a new W-9 from each independent contractor annually, as their business information may have changed.

If you are a service-based small business that has received payments, you will have incoming 1099s. If you are expecting a Form 1099 and have not received one, be sure to include this in the gross income of your tax return. If the information on the Form 1099 is incorrect, be sure to contact the payer to get it corrected, and if you are unable to do so, attach an explanation to your tax return.

Look at I-9s for Expiring Documents

Form I-9 verifies the identity and employment authorization for new employees who have been hired to work in the United States (citizens and non-citizens). Employers are expected to reverify should an employee’s employment authorization documentation expire.

If you have any questions about completing and managing Form I-9, be sure to speak with your tax preparer and/or payroll provider.

Request New W-4s from Employees

Form W-4 is used to withhold income tax from employees’ pay. Employers should ensure that they have new W-4s for:

  • New employees
  • Employees who had a change in their personal or financial situation
  • Employees who are claiming exemption from withholding

Employers are encouraged to remind employees to submit a new W-4 form if their withholding allowances have changed or will change next year.

Review Balances, and Check That They Match the Balance Sheet

When recording loan balances, small-business owners should record payments to their loan principal and interest separately, as only payments on the loan interest are tax-deductible.

Verify that credit card purchases have been entered, and reconcile the credit card at year-end.

Accounts and trade payables need to be verified to ensure that balances that show due for unpaid taxes, vendor invoices, and trade invoices match the detail in the accounts payable.

As part of your business tax preparation, it’s important to review your loan, credit card, and vendor statements with your bookkeeper at the end of the year to ensure that the loan balances on your balance sheet are accurate and match the balances on your statements.

Plan to take this as part of your paperwork for your tax preparer.

Review Your Profit and Loss, and Consider Tax-Saving Strategies

Your profit and loss (P&L) statement, also called the income statement, summarizes your revenue and expenses throughout the year. Your P&L will include much of the information you’ll need during your business tax preparation.

As you review your P&L statement, you may be able to lower your total taxes by considering strategies such as:

  • Updating the corporate structure of your business
  • Establishing a retirement plan
  • Claiming first-year bonus depreciation (a tax break for assets purchased)
  • Deferring or accelerating income depending on your tax situation (for those who use pass-through entities)

Be sure to run both the balance sheet and P&L, or income statement as it is known on most software packages, using the same method—cash or accrual.

Remember to consult your tax preparer to be proactive with your tax planning and see if you qualify for potential savings.

Check In with Your Tax Preparer

In addition to providing you with information and advice on key tax decisions, having a professional prepare your tax forms can ease the pain of tax season, and in many cases the deductions and recommendations they make can save their fee and more!

A tax professional will help ensure that your business taxes are filed correctly and that you are maximizing any deductions or credits available to your small business.

To avoid needing multiple appointments with your tax preparer, ask for a client organizer or guidance on what to prepare in advance of your appointment.

If you haven’t yet hired a tax professional, here are some tips to help you find the right tax preparer:

  • Consider requiring a CPA, law license, or Enrolled Agent designation. It is relatively easy to obtain a Preparer Tax Identification Number (PTIN), which is required of all paid tax preparers, so credentials that require varying amounts of study and ongoing education can help in finding the right person to help with your taxes.
  • Check their qualifications using the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
  • Check their history through the Better Business Bureau.
  • Ask to e-file. E-filing is required for those who prepare more than 10 returns. If your tax preparer does not offer e-filing, it may indicate that they do not do a lot of tax preparation.

Request a Tax-Filing Extension if Necessary

If you’ve already begun to think about business tax preparation, you’re likely ahead of the game, but there are times when an extension may be necessary.

If you don’t think you’ll be able to file your taxes by the deadline, it’s possible to request an extension from the IRS, which will give you until the fall to file your tax return.

It’s important to note that, even if the filing deadline is extended, you must pay your taxes by the original deadline to ensure that you don’t get penalized.

Business Tax Preparation at the Oregon SBDC

The Oregon Small Business Development Center Network is committed to building Oregon’s best businesses. Our 19 centers assist small businesses throughout Oregon with advising, classes, and access to the resources they need to be successful, including business tax preparation. Each center is backed by our statewide network of support, helping small businesses access the right assistance wherever they are in Oregon.

A few of our services that help small-business owners with business tax preparation include:

Oregon’s small businesses are as unique as our state, and our knowledgeable team of advisers can help you with any challenges you face while preparing for tax season. If you have any questions about preparing for your business taxes, connect with your local SBDC at