Bridging the Gap Between Your Roles as a Bookkeeperby
Who is your client? If you’re like most independent bookkeepers, you’re thinking, “Business owners, of course!” But do you act as though this is true? Or does your bookkeeping suggest your clients’ CPAs are actually your clients?
Let’s take a quick look at what you consider “the right way” to do bookkeeping. Your perspective about this indicates who you are really serving with your bookkeeping practice.
It's All About Perspective
What perspective do you take when you do a client’s bookkeeping? If you’re like many bookkeepers, the books you keep are “tax prep ready.” What does “tax prep ready” mean?
- The bookkeeping is done on the same basis as the tax return. This is usually a cash basis, although if your client has accounts receivable or accounts payable, you might run accrual basis financials to include that activity.
- Any expenses that cannot be deducted on the business tax return are either excluded from the books altogether or posted to an equity account like the owner’s draw, shareholder distributions or loan to owner/shareholder.
- Depreciation entries are only recorded once a year, using the numbers the CPA provides.
- Purchases that fall under the safe harbor threshold are posted as expenses instead of assets, even if that purchase is for a piece of equipment expected to last several years.
The Pitfalls of the Tax-Prep-Ready Perspective
It’s important to file accurate tax returns. Part of your role as the bookkeeper is to make sure the CPA has the right information to file a tax return that neither overstates nor understates your clients’ taxable income.
But this is only one very small part of your role. Your clients’ bookkeeping is used to file their tax return one day each year, but your clients use their bookkeeping to run their businesses 365 days a year. In other words, you only need to be concerned with what the CPA thinks of your bookkeeping when it’s time for him to prepare the client’s tax return. The rest of the year, your clients’ needs are more important. Those needs are very rarely served by tax prep ready books.
As a bookkeeper, your largest and most important role is to provide bookkeeping and reports your clients can use to make wise business decisions. When you keep your clients’ books in tax-prep-ready condition throughout the year, you could actually be providing them with information that is incomplete for this purpose.
For example, let’s say your client purchases season tickets for your local Major League Baseball team’s games specifically for the purpose of inviting potential customers to the games. Over the years, your client has found he closes many high-dollar contracts for his company during or immediately following these social events.
If you were keeping this client’s books in tax-prep-ready condition, you would explain to your client that this expense is no longer tax deductible and therefore not a business expense. You would then post the purchase of the season tickets - and any additional expenses incurred during the game - to an equity account like an owner’s draw or loan to shareholder.
But did this purchase cease to be a business expense just because it is no longer tax deductible? No; this season ticket purchase is a large part of your client’s marketing budget, and he knows he will gain business from this purchase.
Will the loss of the tax write-off be enough to dissuade your client from purchasing season tickets and inviting potential customers to the games? Probably not, given that he purchases these tickets specifically for the purpose of entertaining prospects who often become high-paying customers.
If you were to post this purchase to an equity account, you would keep the client’s books tax prep ready. But you would also skew his year-over-year profit and loss statements, impairing his ability to make quick comparisons and gauge changes in his business’s health. You would also cloud the cause-and-effect relationship between the purchase of the tickets and an increase in business income.
As a result, your client could make decisions that have a negative impact on his business based on information that is completely accurate for tax purposes but incomplete for management purposes.
Bridging the Gap Between Your Roles as a Bookkeeper
How do you bridge this gap between what the CPA needs at tax time and what your client needs the rest of the year?
- Start by having a conversation with your clients about the two different purposes of their bookkeeping. Explain that you want to provide them with the information they need to run their businesses profitably throughout the year and that these management reports will differ from what the CPA needs to prepare their tax return. Reassure them you will work with the CPA to make sure what is included on the tax return is accurate.
- Structure your bookkeeping to provide your clients, their CPAs and you with everything needed to provide information quickly and clearly. Using accounts nested under Other Expenses for expenses that are not tax deductible will let your clients see their complete business pictures for management purposes. These accounts will also let your clients’ CPAs see the expenses which are not tax deductible and easily exclude them from the tax return. And, if you need to make adjustments to get the bookkeeping tax prep ready, separating these expenses will let you do so quickly and accurately, without having to scrub down the books.
- Continue to post asset purchases to the balance sheet, even if they fall under the safe harbor threshold. At tax time, provide your clients’ CPAs with a list of asset purchases made during the year so they can treat them in the most advantageous way for your clients.
- Have regular conversations with your clients, and include their CPAs if possible. During these conversations, remind your clients of the dual purposes of bookkeeping. Explain which expenses on their P&L are not tax deductible and how that will impact their taxable profit. This is where having the CPA involved in the conversation can be helpful, as you can both work directly with the client to serve all their needs and give them a complete picture of their financial situation.
The CPA is not your client, but that doesn’t mean you need to be at odds with him. With a slight perspective shift and a few changes to the way you do the bookkeeping, you can provide your clients with what they need to run their businesses while still providing their CPAs with what they need to prepare the tax returns. And you can do so without creating a lot of additional work for yourself.
Billie Anne Grigg has been a bookkeeper since before the turn of the century (this one, despite what her children think). She is a QuickBooks Online ProAdvisor, LivePlan Expert Advisor, and a Mastery Level Certified Profit First Professionals. She is also a guide (coach) for the Profit First Professionals organization. Billie Anne started...