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Bad Records Led To This Small Biz’s Tax Problems And More

taxes with audit stamped on them Like many small businesses, one New York pizza place suffered from a prevalent issue: lackluster or nonexistent record keeping that led to tax problems.

Its owners, twin brothers, had run the business successfully for years after inheriting it from their parents. But without the support of an experienced small business and tax advisor, the owners eventually ran into several issues.

Until the owners partnered with a local tax and business consultant, they incurred tax penalties and had no visibility into the financial health of their small business.

The Results Of Poor Record Keeping

The shop’s owners never paid much attention to record keeping because they didn’t understand its importance. They cut checks out of QuickBooks and paid their bills, but didn’t properly report their income, expenses or payroll.

The brothers believed they were doing well, even though they didn’t know their total revenues and expenses or profits.

Realistically, many small business owners assume they’re making money, but are actually losing money or barely turning a profit.

Eventually, the brothers received notices from the IRS. Their small business was audited several times, and they forfeited plenty of profit to tax penalties and interest.

Finally, they partnered with an advisor to address their issues.

Addressing Their Immediate Tax Problems

Initially, the owners’ tax consultant helped them to understand their most fundamental problem: Their business entity (a partnership) did not pay its employees through payroll. But the two brothers filed W-2s and were paid as employees.

They were actually paying more taxes than necessary!

Their advisor helped them develop a plan to take separate income from the business as their reasonable salary. Now they would only pay taxes from a personal perspective, rather than personal and payroll taxes out of the company.

Finally, their consultant emphasized the importance of properly reporting their income. Inaccurately reported earnings are a potential pitfall, and was a likely cause of their audits.

Streamlining The Business To Maximize Its Profits

The advisor’s top objective was to work with the brothers to record their expenses and properly report their income. Without solid records, not even their consultant could truly help them improve their business.

Once he started to gain visibility into their finances through their records, the business advisor centered the discussions on saving and preparation, and in particular how these impacted their finances (especially taxes).

With more insight into their cost of goods sold and food pricing, he showed the owners how each affected their bottom line. He also provided tips that would help them save. For instance, he advised that they write off expenses in December when they were having a profitable year. The difference between paying big expenses on December 31 versus January 1 can be substantial from an income tax perspective.

Without consistent record keeping and month-to-month reporting, however, they’d have had no way to know whether such a decision would be advantageous.

Lastly, their small business advisor recommended raising their prices when food costs increased. Food costs should typically be between 30% and 35% of revenue. The owners now review their prices every six months or so.

The Results Every Business Owner Wants To See

While the brothers’ pizza shop had been doing well prior to working with their tax and business advisor, it’s now approaching $1 million in gross income, growing over 33% in the four years since the two parties began working together. And just as important, their consultant has helped them maximize and grow the business’s profit margins each year.

With structure to their business, from both a financial and tax perspective, the owners now know exactly what they’re making and have little audit risk. As a result, their tax problems are far in the past.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.

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