Tax tips & resources
Bookkeeping Basics for Small Business Owners
Clean books make tax time faster, cheaper and less stressful. Here are the five building blocks every business tracks, and what each one means when your return is prepared.
The big picture: two reports, five categories
Every dollar in your business lands in one of five categories. Three of them describe what the business has and owes (the balance sheet). Two describe what it earned and spent during the year (the profit and loss, or income statement).
And over a year: Income − Expenses = Profit, which is what generally gets taxed.
The five categories, with tax-time tips
Income
What comes in
- Sales and service revenue
- Fees and commissions
- Rental income
- Interest and dividends
- Grants and other income
Tax tip: Report all income, even without a 1099. Deposit business money into a business account so nothing gets missed.
Expenses
What it costs to operate
- Wages and contractors
- Rent and utilities
- Phone and internet
- Office supplies and software
- Advertising, travel, repairs, insurance
Tax tip: Expenses must be ordinary and necessary for the business. Keep receipts and note the business purpose.
Assets
What the business owns
- Cash and bank balances
- Inventory
- Money customers owe you
- Vehicles, equipment, furniture
- Land and buildings
Tax tip: Big purchases like equipment are usually recovered through depreciation or special elections, not always a one-time expense.
Liabilities
What the business owes
- Loans and credit card balances
- Bills owed to suppliers
- Unpaid rent and accrued expenses
- Taxes owed (payroll, sales, income)
Tax tip: Loan interest is generally deductible, but the loan principal you repay is not.
Equity
The owner’s stake
- Owner’s capital (money put in)
- Retained earnings
- Shares or ownership interests
- Reserves
Tax tip: Owner draws and distributions are not business expenses.
Quick check
Not sure where it goes?
Ask: Did the business earn it, spend it, own it, owe it, or does it belong to the owner? The answer points to the category.
If a transaction still doesn’t fit, flag it for your preparer instead of guessing.
Where common expenses show up on Schedule C
Sole proprietors and single-member LLCs report business income and expenses on Schedule C (Form 1040). Common examples:
| Everyday expense | Typically reported as |
|---|---|
| Ads, website, promotion | Advertising |
| Rent for office or shop | Rent or lease |
| Electricity, water, phone, internet | Utilities |
| Pens, paper, small supplies | Office expense or supplies |
| Wages paid to employees | Wages (payroll taxes go under Taxes and licenses) |
| Repairs and maintenance | Repairs and maintenance |
| Business travel and vehicle use | Travel, or Car and truck expenses (mileage or actual costs, with a log) |
| Computers and equipment | Depreciation (or Section 179 expensing, when it applies) |
Partnerships and corporations use different forms (1065, 1120-S, 1120) but track the same five categories. Some expenses, such as meals, have limits.
Two habits that make tax season easier
1. Categorize monthly
Sort transactions into the five categories each month, not in a rush in March. Small, regular updates catch mistakes while you still remember what they were.
2. Plan for estimated taxes
Self-employed owners generally pay tax quarterly. Our Self-Employment Tax Calculator can give you a starting estimate.
Questions about separating business and personal money, or how long to keep records? See Choosing a Business Structure.
Ready to get your business return handled?
Start in our secure client portal, or reach out and we’ll point you to the right service for your business.
Related: Business Tax Returns • Business Entity Services • Choosing a Business Structure