Did you know that the financials you show to IRS is actually different than the one you use for strategy? Hold on! There’s no need to be panic. Check out this video and see what the differences are and why you should keep two sets of numbers for your business.
Topic – How IRS See Your Book Differently
Accrual Basis
Business Accounting
[0:30] Strategy accounting (business accounting) has to be the accrual basis so that we can see the best reality of our business. We do the best at matching our expense and money. Therefore, we know for every dollar we spend how much we bring it back. On the other hand
Tax accounting
[00:47] Cash accounting (tax accounting) is what we do for preparing tax. We only pay money taxes on the money we have earned and received. So, we won’t be stuck with the huge bill that we don’t have money to pay for.
Depreciation
Business Accounting
[1:01] When you buy a piece of machinery/equipment for your business, it becomes your asset which has the real value. Therefore, you have to record it on your balance sheet/ledger. By doing this, you can see how well your asset is turning into profit, or when you’re selling your company, these assets add value to the company.
Tax Accounting
[01:25]However, when it comes to tax accounting, you want to depreciate this machinery/ equipment as soon as possible because we want to save tax on these. And IRS allows you to do that, section 179 allows you deduct a certain amount in year one of your entire equipment/machinery.
Meals and Entertainment
Business Accounting
[01:46] Entrepreneurs understand that network is their life. How do you build your network? You go out and spend time and money with those people who matter to your business. In business accounting, it’s kind of legitimate business investment.
Tax Accounting
[02:14] However, IRS see this kind of investment differently, because you have to eat anyway. So for meals and entertainment, IRS only allows 15% of deduction.
Key takeaways
M1 Schedule is what we called “book to tax adjustment” which accounts all of the differences between the truth and tax law, also the sets of number to file the tax return. Have your tax accountant keep the tax adjustment on M1 schedule instead of keeping it on your current books which confuse you.
