Accounting

Since the 1040 Schedule C is your basic profit and loss statement, I set up my chart of accounts to match the Schedule C as closely as possible.  You should need very few categories that aren’t listed on the Schedule C.  If your state has a sales tax and you have differing tax rates in your area you should break down your sales by tax region.  Also, keep track of tax paid on materials purchases by tax region.

Yes.  At the time of this writing, IRS Form 2106 instructions (for 2008 returns) had this to say about record keeping for your vehicle: “You cannot deduct expenses for travel…unless you keep records to prove the time, place, (and) business purpose…of these expenses.”

I keep a small spiral notebook in the visor of my truck.  Each morning I list the names of the jobs I’ll be doing and the current odometer reading.  As I go from job to job, I record the odometer reading.  At the end of the month, this page is torn from the book and added to the file that I keep for each month’s receipts.  (Every month has its own folder.)  When matched with invoices these logs serve as my written record of mileage and business purpose.

In the same spiral notebook; record the money you spend for gas, insurance, registration, maintenance and repairs of the vehicle.  Save your receipts.  At year end you will decide whether to take the standard mileage rate or actual expenses on your taxes.  Check the tax codes for limitations and for the current mileage deduction rates.

What legal business structure should I choose?  The three most commonly chosen legal business structures are Sole Proprietorship, Limited Liability Company (LLC), and S Corporation.  Because I am not a lawyer or a tax attorney I am not qualified to recommend one structure over another.  I can only tell you what I have done and strongly recommend that you consult with an attorney and an accountant before making your final decision.

I chose the simplest and most basic structure you could set up, with all of its benefits and pitfalls – the Sole Proprietorship.  As a Sole Proprietor income is reported on the individual income tax return (1040, Schedule C) so there is very little additional paperwork.  If you choose this option you represent the company legally and fully and you are personally liable for all debts and actions of the company.  If something went drastically wrong with a job you completed your assets could be at risk.  This makes it very important to carry sufficient liability insurance.

I suggest you seriously consider forming an LLC, particularly if you have a lot of personal assets and/or will be hiring employees.  Since the handyman trade could be considered a high risk industry, many handymen choose this option.  This structure affords the members (owners) the liability protection of a corporation.  Unfortunately, this liability protection may not be complete as you could still be held personally liable for your actions if you have signed a personal guarantee.  Personal guarantees are often required by banking institutions if you get a business loan.

A third option, often chosen by contractors is the S Corporation (Small Business Corporation).  This structure allows the profits to be taxed in a way similar to a Sole Proprietorship avoiding the double taxation problem inherent to the corporate system.  As with the LLC, the presence of a personal guarantee would leave the owners personally responsible for debts.

For inexpensive legal advice I became a member of Pre-Paid Legal Services.  This is an extremely low cost legal service that I have found to be a great asset.  For less than $20 per month you have legal advice that is just a phone call away.  It’s a lot like having a lawyer on your payroll!  Pre-Paid Legal associates are easy to find and they will be glad to sign you up.

Federal income taxes, state income taxes, city business license tax, sales tax, payroll taxes, wow!  Taxes and recordkeeping can be quite a load.

Your record keeping will make or break your business success.  Setting your books up correctly from the start will make everything easier when it becomes time to prepare your taxes.

Here are some keys to success:

1. Open a separate checking and savings account for your business.
2. Get a new visa card strictly for your business use.
3. Keep all of your receipts, job invoices and bank statements.
4. Purchase a box of file folders to store your receipts, invoices and bank statements.  Keep them in a file drawer or file storage box organized one folder for each month.
5. Keep separate files for insurance, sales tax, business taxes, and licensing.
6. Maintain mileage logs reflecting odometer readings and job names.
7. Use a computer based bookkeeping system and set up your chart of accounts as shown below.
8. Keep on top of your bookkeeping.  Don’t let it pile up!
9. Be aware of the different sales tax rates you may have in your area.  In my immediate vicinity there are four different sales tax rates.  Because of this, I keep track of my sales by area. This helps tremendously when the time comes to complete the sales tax return!

I do all my own bookkeeping and file the returns myself.  I use Quicken® because it is inexpensive and easy to use.  Any bookkeeping system should help you successfully track income and expenses and easily complete your taxes.

Unless you’ve had a lot of experience with taxes, you may want to have a tax preparer complete your first year’s tax returns.  In subsequent years you can often prepare your own taxes by following last year’s example.

I have found that after the chart of accounts has been set up properly your bookkeeping system simply requires maintenance. Bookkeeping software has greatly simplified this once difficult task and has made it possible for someone like myself, who has moderate bookkeeping and tax experience, to do it myself.

Alternatively, you may have a spouse or partner available to do the bookkeeping.  If their time permits, in addition to preparing the deposits and paying the bills, they could answer incoming phone calls, contact clients regarding scheduling and make follow-up calls.  Your time would be freed up to make estimates and complete more jobs.  This arrangement could ultimately translate into better customer service for your clients and more income for you both.

The most important thing is that the bookkeeping and taxes be prepared accurately and on time.  Accountants and tax preparers are called experts for a reason, bring them in if you need advice and to save yourself time and aggravation.