Bookkeeping Basics for New Businesses

While 2025 accounting software is powerful, working with an accountant or qualified bookkeeper remains highly valuable. Software automates data entry and report generation, but professionals provide:

• Strategic financial advice tailored to your business goals and challenges.
• Accurate setup of your accounting system and Chart of Accounts.
• Expertise in tax planning, compliance, and identifying potential savings.
• Interpretation of complex financial reports and key metrics.
• Guidance on handling non-routine transactions or specific industry requirements.
• An objective review of your financial health and internal controls.

Many businesses benefit from a hybrid approach: using software for daily tasks while engaging a professional for initial setup, monthly or quarterly reviews, tax preparation, and strategic financial planning sessions.

Record retention is crucial for tax compliance and business management. General IRS guidelines (State rules may vary - always verify):

• Keep permanently: Core legal documents (Articles of Incorporation/Organization, Operating Agreements, Bylaws), business licenses/permits, deeds/titles to property, stock ledgers, important contracts, general ledgers, year-end financial statements, tax returns (many recommend keeping these indefinitely).
• Keep for at least 7 years: Supporting documents for tax returns (receipts, invoices, cancelled checks, bank/credit card statements relevant to income or deductions), payroll records (W-2s, 1099s, timecards, payroll tax filings), sales tax records, inventory records, expense reports. This covers the typical statute of limitations for audits.
• Keep for at least 4 years: Employment tax records (as per IRS guidelines).
• Keep for 3 years (or longer if needed): Bank deposit slips, general correspondence, expired insurance policies (check policy terms). Employment applications may have specific retention periods under labor laws.

The IRS generally has three years from the date you file your return to audit, but this extends to six years if you substantially understate income, and indefinitely if you file a fraudulent return or fail to file. Digital storage is recommended for long-term retention and easy access. When in doubt, err on the side of keeping records longer. Consult with your accountant or attorney for specific advice.

Tax rules for meals and entertainment require careful documentation in 2025:

• Business Meals: Generally, the cost of ordinary and necessary business meals is 50% deductible if the expense is not lavish or extravagant under the circumstances, the taxpayer (or an employee of the taxpayer) is present, and the meal is provided to a current or potential business customer, client, consultant, or similar business contact. Food and beverages provided during entertainment events may be deductible if purchased separately from the entertainment itself. The temporary 100% deduction for meals provided by restaurants expired at the end of 2022.
• Entertainment Expenses: Costs for activities generally considered entertainment, amusement, or recreation (e.g., sporting events, theater tickets, golf outings) are not deductible, even if business is discussed before, during, or after the event. There are very limited exceptions, such as certain recreational expenses primarily for the benefit of non-highly compensated employees (like a company holiday party).

Crucial Documentation for Deductible Meals (Keep Receipts!):

1. Amount of the expense.
2. Date and place of the meal.
3. Business purpose of the meal or discussion.
4. Business relationship of the persons involved (names, titles, company affiliations).

Make detailed notes directly on receipts or within your expense tracking system immediately after the expense occurs. Tax laws are complex and subject to interpretation; always consult with your tax advisor for specific guidance.

The best method depends on your business specifics:

Cash Basis Accounting: Records income only when cash is received and expenses only when cash is paid out. It's simpler to manage and clearly reflects your cash position. Often suitable for small service-based businesses without inventory.

Accrual Basis Accounting: Records income when it is earned (e.g., when an invoice is sent or service provided) and expenses when they are incurred (e.g., when a bill is received), regardless of when cash changes hands. This provides a more accurate picture of profitability over a period, matching revenues with the expenses incurred to generate them. Accrual basis is required by Generally Accepted Accounting Principles (GAAP) and may be required by the IRS if:

• Your business regularly carries inventory that is a material income-producing factor.
• Your average annual gross receipts over the prior three years exceed a specific threshold (this threshold is indexed for inflation, check current IRS Publication 538 for the 2025 limit, it was $29 million for 2023/2024).
• You are structured as a C Corporation (with some exceptions for smaller C-corps).

Many small businesses start with cash basis due to its simplicity but may need to switch to accrual as they grow, take on inventory, or seek certain types of financing. Discuss the implications and requirements for your specific situation with an accounting professional.

You generally have two options for deducting business vehicle use in 2025:

1. Standard Mileage Rate: Deduct a set amount per business mile driven. For 2025, the official IRS rate is 70 cents per mile. This method is simpler but requires meticulous, contemporaneous tracking of: business miles driven, dates of trips, destinations, and the business purpose of each trip. You can typically also deduct business-related parking fees and tolls separately.
2. Actual Expenses Method: Deduct the business-use percentage of your actual vehicle operating costs. This includes gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments if leasing). This requires tracking all these costs *and* accurately calculating the percentage of total miles driven for business versus personal use throughout the year.

You generally must choose a method in the first year a car is placed in service for business. There are restrictions on switching methods later, especially if you claimed certain types of depreciation. Detailed, accurate mileage logs are essential regardless of the method chosen. Using a GPS-enabled mileage tracking app can greatly simplify this documentation.

Important: Always verify the official standard mileage rate and detailed rules directly on the IRS website (IRS.gov) or consult with a qualified tax professional, as specifics can impact eligibility and deductions.