As a bookkeeper, your role doesn’t revolve around taxes. However, the work you do can position your client’s tax professional to make decisions that have a great impact on your client’s tax deductions when tax time rolls around.

Continue reading as we cover 5 tax hacks (or tips) you can implement to ensure you’re helping your client’s tax professionals maximize your client’s tax deductions at tax time. 

1. Your Business Structure Determines How the Owner(s) are Compensated.

As a bookkeeper, it’s essential you understand how your client’s company is set up for legal and tax purposes. The way it is structured affects:

1. How you set up the books
2. How the owner(s) are compensated

Check out the chart below to see the different ways owner(s) can be compensated based on how the entity is set up for legal and tax purposes.

2. Addressing Your Client’s Commingling 

As bookkeepers, we learned early on that the first rule to keeping good financial records is not to commingle business and personal funds in your bank and credit card accounts.

Some examples of commingling are:

• Paying personal expenses out of your business account and vice versa
• Charging personal expenses on your business credit card and vice versa

While it’s best practice not to commingle for several reasons, it is NOT a hard and fast requirement that your clients keep business and personal accounts separate. 

The truth is, most businesses do commingle to some extent. So it’s your role to know how to handle these situations to best serve your clients. 

Here’s what I recommend you do as a bookkeeper:

Commingling Accounts 

First, advise your client against commingling accounts by educating them on the benefits of keeping their business and personal bank and credit card accounts separate. Remind them of the pitfalls as well. 

Hopefully, your client will take your advice. But, the reality is that many business owners will continue to commingle accounts. In fact, it is not uncommon that they do so due mostly for:

• Convenience
• Cash flow crunches
• Time constraints
• Merely disorganization

Secondly, if they continue to commingle accounts, don’t despair. With good communication between you and your client, you can still do their bookkeeping properly and provide accurate “tax-ready books” at tax time.  

Make sure your client informs you of which expenses are personal in nature. Then, simply classify the personal expenses to the appropriate equity account (i.e. Owner Draw, Partner Draw, etc.). That way, your client's personal expenses will NOT be reflected in the business’ profit and loss statement but rather as a reduction in equity. 

This “isolates” the personal expenses in the client’s books so their tax professional knows not to deduct them as a business expense on the client’s business tax return.

3. Vehicle Expenses 

It’s very common for business owners to use their personal vehicles in their business and deduct the business portion of the expenses on their business income tax return. Regardless of how the tax professional decides to deduct your client's vehicle expenses (i.e. actual expenses or standard mileage rate), as their bookkeeper, I recommend doing the following so that the tax professional has all of the information they need to maximize your client’s vehicle expense deductions.

1. Keep track of your client's vehicle expenses for the entire year by classifying the expense under an appropriate expense account such as “Automobile Expenses”.  While keeping receipts is ideal, keep in mind that the client is NOT required to have receipts for vehicle expenses under $75. For example, they do not need a receipt for the $70 expenditure for gasoline to fill their business vehicle. Their credit card statement is adequate for tracking the under $75 expenses (Per IRS Pub.463 https://www.irs.gov/pub/irs-pdf/p463.pdf).
2. Advise your client that they are required to keep a mileage log (written or use an app for their mileage such as Mileage IQ) which should include the date, time, # of miles, and the business purpose. The mileage log helps your client's tax professional determine what percentage of the vehicle expenses are business vs. personal use and it provides substantiation for the business deduction.  

4. Meeting (or not) IRS Receipt Requirements

Keeping track of paper receipts is stressful for both business owners and bookkeepers. They’re easy to misplace, tear, or smudge and by tax time, the ink has likely rubbed off the paper. For bookkeepers, it’s easy to spend hours and days trying to chase down receipts from your clients. 

However, the good news is that receipts aren’t the only form of documentation your client can use to support a business expense. 

The IRS says (in IRS Pub. 583) that you are required to keep supporting documentation for your business expenses that you deduct on your tax return, indicating: 

• What you bought
• When you bought it
• How much you spent 

The IRS says in it’s own words (IRS Publication 583), “documentation for expenses include the following”:

• Canceled checks (or other documents reflecting proof of payment/electronic funds transferred)
• Cash register tapes
• Account statements (includes bank statements and credit card statements)
• Credit card sales slips

While a receipt is one way to demonstrate that information, the IRS makes no mention of requiring a receipt at all. 

Furthermore, a special IRS provision called the “Cohan Rule” allows taxpayers to estimate the cost of and deduct certain business expenses even if they don’t have records to support them.

Based on this information, here’s how I recommend bookkeepers take the stress off to better serve their clients:

Understand that ultimately, the burden of proof for your client’s business tax deductions is on your client.   

With that said, you will want to set clear expectations with your clients on whether you’ll be managing their receipts and other documentation and to what extent or if they will be responsible for it.      

Now, make no mistake, I’m not advocating for no receipts - quite the contrary. In fact, I always recommend keeping receipts whenever possible because they serve as great supporting documentation.  But, don’t panic if your client is missing some receipts and most certainly don’t do your client a disservice by disqualifying a business expense deduction simply because they are missing a receipt. In doing so, you’re likely costing your clients hundreds or even thousands of dollars in taxes due to lost business deductions. 

5. Managing Business Meals and Entertainment

I recommend that you create 3 sub-accounts under Meals & Entertainment Expense:

• M&E - 100% Deductible
• M&E - 50% Deductible
• M&E - 0% [Not Deductible]

Then, code each of your client’s meals and/or entertainment expenditures to the appropriate subaccount based on the deductible amount in the table below.

This will give your client’s tax professional the necessary information they need to report the deductions properly on your client’s tax return. Remember, you have to document who, where, and why for each expenditure. 

Help Your Bookkeeping Clients (and Their Tax Professional) Prepare for Tax Time

Remember, the work you do throughout the year plays a significant role come tax time. It’s essential you keep accurate records and consider the implications while keeping the books. 

While this list wasn’t all-inclusive, it’s a good starting point. 

If you’re a bookkeeper and are searching for support in best serving your clients, reach out to Bookkeepers IGNITE! I help new and seasoned bookkeeping professionals build, grow, and scale their businesses and would love to help you do the same.