Two Accounting Mistakes Business Owners Should Never Make
As a business owner, you know that there are plenty of accounting tasks and duties that you should take care of. Your accountant makes suggestions. Your banker maybe specifies particular requirements. Heck, even your bookkeeper may regularly be pointing out things you need to take care of. Here, however, rather than pointing out things you should do, Ill point out two things that you should never do.
Misrepresent Your Financial Affairs
\r You should never misrepresent your financial condition and your businesss financial performance. You may think that you would never do this, but let me tell you how it always seems to start. You go to the bank for a loan (perhaps a home mortgage). The bank loan officer looks at your businesss profit & loss statement and then tells you that youre not making quite enough money or that your debts seem a bit high.
It appears that a fair number of business owners go home, mull things over, and then think, What if I made more money? Asking and answering this question leads quite naturally to a careful review of the accounting software data, and suddenly the business owner has re-categorized a series of business transactions as personal expenses. This has the nice effect of increasing the business profits. When the bank loan officer looks at your profit & loss statement, the loan is approved.
This may seem like a harmless solution, but misrepresenting your finances subjects you to two extremely serious risks. First, by misrepresenting your finances, youve committed a felony because you fraudulently obtained your loan. In a worst-case scenario, the bank can probably force you to repay the loan immediately. Many of the laws that normally protect you if youre a borrower dont protect you if youve fraudulently obtained a loan. (In a bankruptcy proceeding, for example, you probably cant escape repayment of fraudulently obtained loans.)
Another serious risk you run by misrepresenting your finances occurs if the IRS audits your return. If the IRS agent sees that expenses you claimed as business deductions on your tax return are later described as personal expenses on a Profit & Loss statement, the IRS can probably disallow the business deductions. If you assured the bank that $3,000 of travel expenses were for a personal vacation, youll need to do a lot of backpedaling to convince the IRS that the $3,000 was really for business travel.
Borrow Payroll Tax Deposit Money
\r Never borrow the money youve deducted from an employees payroll check for taxes, and never spend the money youve set aside for the payroll taxes that you owe as the employer. If for any reason you cant repay the money, the IRS will pursue you with merciless vigor.\r If you get to the point where you cant continue business without dipping into the payroll tax deposit money, dont compound your problems by getting into trouble with the IRS. It doesnt matter what you want to use the money for. If you cant make payroll, cant get a supplier to deliver goods, or cant pay the rent without borrowing a bit of the payroll tax deposit money, you simply cant make payroll, receive the goods, or pay the rent.
If you did borrow the payroll tax deposit money, you would be stealing from the IRS. And when the IRS finds out, the IRS may padlock your business some afternoon, thereby putting you out of business; seize any valuable personal assets you own, including your home; and garnish your wages if you get another job. In short, the IRS will do anything it legally can to collect the money you should have paid.
Because of all this, I cant imagine a situation in which it makes sense to borrow the payroll tax deposit money. If things are so bad that you cant go on without taking the payroll tax deposit money, its time for you to consider drastic actionperhaps closing the business, filing for bankruptcy, laying off employees, or finding an investor.
About the author: CPA Stephen L. Nelson wrote bestselling books on Quicken and QuickBooks. More recently, hes been writing downloadable do-it-yourself guides, including \r Incorporating a Business in Texas,\r Incorporating a Business in Florida , and \r Incorporating a Business in NewYork.
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