True story. Company X (as we will call them) had a small net loss their books and their QuickBooks accounting system is kept on the accrual basis. The balances are all correct. The company assumed that they owed no taxes because they were following their books to plan their taxes. However, upon further review, the company files its tax returns on the cash basis and actually had a cash profit of $110,000 resulting in a tax of $30,000 for combined federal and state corporate taxes. The company was shocked, of course. How can you prevent this in the future?
The first recommendation is to make sure your books can toggle between accrual and cash basis (which requires accurate data entry). A second recommendation is to watch the bank account balance net of any loan advances or repayments. The surprised company noticed that the bank account increased by, you got it, $110,000. This is usually a hint that there is some profit. Finally, make sure you do year-end planning to avoid this from happening to you.
At Moker CPA, we have seen countless horror stories about accounting for businesses. Call us today, or visit mokercpa.com to learn how we can help you.