Business Record Mixup Leads to Lost Deductions

This is another entry in our Stupid Business Stories collection

PROBLEM

A client ran multiple healthcare businesses. One was established in 2004 as an S-Corp, and the other was created in 2007 as an LLC. The sole owner had controlling interest in both corporations.

When the LLC was formed, staff was “borrowed” from the first corporation, supplies were shared, and the receipts were stashed in a box. The owner intermingled the bank accounts.

When I was called in a year later, it was difficult to compile and allocate costs for each of the businesses. There was no accounting in the first year and her personal 1040 tax return did not reflect the activities of the LLC like it should have.

After I recommended permanent staff for accounting, and I sett up Quickbooks for the LLC, I wrote out policies and internal control procedures. I thought everything was squared away. However, things were back to the same situation the following year, and her tax returns had to be amended for 2 years.

She had to pay more in bookkeeping and tax return fees, had a higher tax bill, had to pay penalties and interest, and she had no understanding of the success or loss from the newer company.

LESSON

1st lesson: Companies setup with S Corporation and LLC status directly impact your income tax return (Form 1040). The accounting for these entities needs to be done on a timely basis to meet tax deadlines for the owner’s individual return.

2nd lesson: Though it may be cost-effective to share costs between businesses, it is imperative that the tracking of these expenses are segregated to provide accurate financial statements, proper accounting treatment, and to protect the owner’s personal liability.

3rd lesson: Hire professionals. Even if there is an accounting clerk on staff to do data entry, have your CPA review the books quarterly to make sure you have proper procedures and analysis with interim financial statements. Your CPA will also be able to give suggestions for revenue enhancements or cost reductions. That will go a long way towards the success of any new business venture.

THANKS TO:

Mercedes Infante
Orlando, FL
Mercedes@InfanteCPA.com

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