By Ken Sakamoto, Star-Bulletin
Peter Matsumoto, a certified public account, says
once a business falls behind on its taxes,
"it's difficult to catch up."

---

Bottom line
must be straight

It's tedious and time consuming,
but keeping proper records is critical

by Peter Wagner
Star-Bulletin

Gloria Sharsh, a single mother of two, started Gloria's Cleaning Service three years ago, her third venture into self-employment in 13 years. She's still trying to pay back taxes because of a poor accounting system.

"I'm good at what I do but my bookkeeping was really bad," she said. "I'm not totally disciplined on that."

But with the help of the Small Business Development Center, she's learning to keep closer tabs on her earnings and is putting money aside for fixed expenses like the state's semi-annual excise tax.

Don't Fall Behind

Good record-keeping, experts say, is critical.

"A lot of times people get so involved with their business they want to go out and sell and they forget their paperwork," said Russell Yamada, president of Honolulu accounting firm PKF-Hawaii. "One of the things I stress is getting your accounting straight."

That means keeping receipts, canceled checks and other documents in something other than a shoe box.

And setting up an accounting system to track monthly expenses, like rent, materials, and taxes.

Peter Matsumoto, a certified public accountant and president of Century Small Business Solutions, Inc., said failing to plan for taxes is a common and costly trap.

"The key to staying in business is not to fall behind," Matsumoto said. "People don't realize how fast taxes accumulate. They get hit with penalties and interest and it's difficult to catch up."

Hawaii's general excise tax requires monthly tax filings if your business pays more than $2,000 in the tax per year.

Quarterly and semi-annual payments apply to smaller businesses.

But it's easy to overlook a tax liability when you're trying to make ends meet in the early trials of a small business.

"It's the No. 1 thing that needs to be done, and it needs to be done on a timely basis," said Matsumoto.

Hands off withholding

Another common occurance, he said, is abuse of the employee payroll withholding tax. "This is the start of the demise for a lot of businesses because they're not treating their taxes with the respect they need."

All too often, he said, an employer struggling to make ends meet will tap payroll withholding money held in trust for state and federal tax agencies.

Sooner or later, the money comes due, and when it's overdue, you face penalties of 5 percent to 25 percent a month, plus interest.

All of this can be avoided with a good business plan that anticipates business expenses and budgets for them, Matsumoto said.

"We set up something called a liability account," he said. "It's easier said than done because most companies are cash poor. But whatever it takes, that needs to be done."

Many accountants agree that inexpensive computer software can do the bookkeeping job for a small business.

But having the wherewithal to make them work is another matter.

"This is where a lot of people get into trouble," Matsumoto said. "Software promoters make it sound so easy but what happens is it's used incorrectly and by the time they come to us, their books are a mess."

Ask a Pro

Many experts agree that professional advice is worth the price, at least initially to set up the needed entries.

Nancy Evans Tudor, a certified public accountant, said many small businesses miss tax deductions because of poor record keeping.

"People drive their cars everywhere and they don't keep records," she said. "Automobile miles are deductable."

She suggests noting where you went on business in an appointment book, so you can estimate mileage on a monthly basis.

Tax guidance

If you've got the time, the IRS has the publications to guide you through business taxes and record keeping, including:

Publication 334, "A Tax Guide for Small Business."

Publication 583, "Starting a Business an Keeping Records."

But study carefully. "The real problem with doing it yourself is you have to make sure you read ev-erything so that you find the exceptions," said Nancy Evans Tudor, an Oahu CPA. "Most of the IRS booklets are written with general rules in the beginning and then you get to the exceptions at the end. So if you quit before you get to the end you may not find something that applies to your situation."

Online tax help

Did you know that the standard mileage rate for automobile deductions decrease from 32.5 cents a mile to 31 cents in April? Or that the health insurance deduction for the self-employed increased this year to 60 percent of the cost from 45 percent last year?

For these and other recent changes in the federal tax code that might affect your business, check out IRS publication 553. It's available at IRS offices or on the agency's Web site at http://www.irs.ustreas.gov.

Click on the small business heading and browse for publications.