A Profit & Loss Statement is useful for running your business when it doesn't break everything down into tiny pieces. If any of your income or expense categories shows a very small amount at the end of the year, consider combining that category with another one to keep your chart of accounts as short as possible.

Sales & Cost of Sales

Sales

If you collect sales tax in California, you need to track your sales by county. Otherwise, just one category called "sales" for all money collected from customers works fine, because the IRS doesn't need to know about the different types of things you sell. Of course, if that information would help you manage your business better, use as many sales categories as you need — we'll just combine them for the tax return.

Cost of Sales

(A business with no physical product should probably have nothing here)

• Items purchased for resale

• Materials, supplies, and small tools used to produce a physical product

• Equipment purchased over $500 (smaller items should go in "supplies") — but see note below

• Payroll directly related to producing your product

Expenses

There's no official list of tax-deductible expenses. To be deductible, an expense must be both "ordinary" and "necessary." An ordinary expense is one that's customary and accepted in your type of business. A necessary expense is one that's useful and appropriate for your business. An expense doesn't have to be absolutely essential to be considered necessary.

Here's a list of common business expenses:

Basic Expenses

• Accounting & bookkeeping services

• Advertising/marketing/business promotion costs

• Bank charges & fees for accepting credit card and PayPal payments

• Commissions paid out

• Continuing education (for your profession or to run the business better)

• Dues & subscriptions

• Insurance (but not health insurance — see below)

• Interest paid (credit cards if used only for business expenses)

• Janitorial service

• Legal fees

• Postage & delivery

• Printing

• Rent — physical space

• Rent — equipment

• Rent — storage space

• Repairs — equipment

• Repairs — physical space

• Security service

• Taxes — business personal property

• Taxes — sales tax remitted to the SBE

• Taxes — federal & state company taxes (not the owner's taxes)

• Telephone

• Utilities paid for the physical space

• Web site costs

Expenses That Need Sub-accounts

Car Expenses (see discussion of business mileage allowance method)

• Car expenses (gas, maintenance, insurance)

• Reimbursements to employees for mileage

• Parking and bridge tolls (while driving for business reasons)

• Car loan payments

Office Supplies, Equipment and Furniture

• Office & computer supplies & small equipment

• Office equipment purchases (items over $2,500) — but see note below

• Furniture purchases (items over $2,500) — but see note below

Travel, Meals and Entertainment

• Travel expenses (airfares, hotels, taxis, rental cars)

• Meals (with customers anywhere, or alone while away from home on business)

• Meals and refreshments for employee events at your place of business

• Meals for employees at your place of business for your (the employer's) convenience

• Entertainment (take your customer to a game!) Update: The business entertainment tax deduction is no longer available for federal taxes. But California hasn't conformed, so the state tax deduction is still available.

Payroll

• Wages paid to employees

• Wages paid to owners

• Payroll taxes paid

• Payroll processing fees

• Health insurance paid for employees

• Health insurance paid for owners

Balance Sheet

Assets

• Cash account (but try not to pay for too much with cash)

• Checking account(s)

• PayPal account (if your customers pay you that way)

• Accounts receivable (if you bill your customers)

• Inventory (if you stockpile a physical product or components)

Liabilities

• Credit card account (a separate account for each card)

I recommend not using the accounts payable feature of QuickBooks. Almost all small businesses report their income and expenses using the "cash basis" of accounting. Running your expenses through payables will make your accounting more complex and cost you more time to clean up at year-end.

Equity

This will depend on the type of entity: sole proprietor (self-employed), partnership, corporation, or LLC (limited liability company), so ask your CPA/tax accountant for guidance.

Important Notes and Reminders

The items listed above aren't always tax deductible. Talk to your CPA.

Additional items to discuss with your CPA include:

• Whether a physical inventory count is required

• How to calculate the deductible portion of vehicle expenses

• Special rules regarding salaries paid to business owners

• Home office expenses

This chart of accounts includes no fixed asset accounts on the balance sheet. This is because it's more useful to record current purchases of equipment in an expense account so that the bottom line tracks the taxable income more closely. If you're a sole proprietor or a one-owner LLC, you won't show a balance sheet on your tax return. Corporations, multi-owner LLCs, and partnerships should receive adjusting journal entries from their CPA to bring the bookkeeping into agreement with the tax return.

Important note: The de minimis safe harbor amount for deducting tangible "units of property" has been raised to $2,500 if that has been the company's policy for the entire year. The policy doesn't have to be written. A written election is required with the tax return. For most companies, bonus depreciation and Section 179 deduction makes this unnecessary.

Here's information on what tax papers you need to keep (bank statements, credit card statements, paid invoices, etc.). You can also review our other resources here.

I like to keep paper copies of credit card statements. Maybe 3 years from now, for audit purposes, you'll need both a bill/invoice and proof of payment.

If you have questions or would like to enlist the tax services of an experienced CPA tax accountant, please contact me.