Top 10 Accounting Mistakes Houston Business Owners Make

Houston is a great place for business owners to function considering its tax regulations and good cost structure that increases the competition within the industry.

It is a hub of business for companies of all sizes as it appears as a desirable location for conducting business.

But, choosing Houston as the most favored place for business could be quite challenging too, there are many mistakes that business owners when they are functioning in Houston.

This article talks about the top ten accounting mistakes that business owners make in Houston.

Ignoring the Difference Between Cash Flow and Profit

Ignoring the distinctions between cash flow and profit is one of the major accounting mistakes that many startup businesses in Houston make.

They might sell a product for $1,500, but what happens if the customer doesn’t pay on time? In that situation, even though their accounting records indicate a profit, they could not actually have the money on hand. S o that they may accurately track their records of sales versus spending records properly.

Not Choosing  the Right Tax Treatment

Many business owners don’t know that since 1997, the IRS has given business owners a never-before-seen degree of control over how the entity will be subject to federal taxation. They can select between passing through treatment and C-corp. Some options are prohibited. The entity must be handled as a corporation if it is incorporated (though an S-corp election is still possible if it is).

Publicly traded LLCs and partnerships must be handled as C-corps. All other types of partnerships may be taxed as either pass-through businesses or C-corps (either as partnerships or, if S-corp status is available and elected, as an S-corp.) By going over budget, they run the risk of their company running out of money.

This would entail juggling additional work and straining to pay for rent, salary, and other expenses. They will be one step closer to safeguarding your company from cash flow problems by taking the effort to comprehend the principles of profit vs. cash flow.

Failing to Properly Classify Employees

According to the U.S. Department of Labor, if a small business owner misclassifies an employee, the federal and state governments lose out on payroll taxes, and the consequences for doing so might be severe.

Houston business owners who misclassify their employees may be responsible for paying payroll, Social Security, unemployment, and Medicare taxes. If an employer fails to pay employees and offer benefits as required by the Fair Labor Standards Act, they may also be subject to fines and legal action.

They must decide whether a person is an employee or a contractor based on the work they do, how they are paid, and their relationship to your organization in order to avoid misclassifying personnel. 

Not Having Enough Insurance for Your Houston Business

Even the best-run company might experience litigation. Coverage for various claims is one of the advantages of insurance, especially general and professional liability insurance.

Most leasing companies in Houston demand that you keep a certain amount of general liability insurance if you are renting office space. Do your homework, conduct some research, and buy renters and property insurance for your benefit and peace of mind.

Too many scenarios—including those involving fire, theft, flood, and water damage—could leave you unable to pay to replace the pricey assets and equipment you need to run your business in Houston.

Confusing Corporate Income Tax and Corporate Franchise Tax

In the United States, there are now six states without a corporate income tax. However, in addition to taxing business income through a corporate income tax or a personal income tax, many jurisdictions also impose a special tax on at least some businesses.

Texas calls its business tax a franchise tax. A corporate income tax is different from a corporate franchise tax in that the former is applied to profit while the latter is not. For permission to operate in a city or state, an organization must pay a corporate franchise tax.

Houston business owners often confuse these and are unable to recognize the difference between corporate franchise and corporate income tax.

Trying To Do Everything Themselves

Many small business owners insist on managing their finances and maintaining their accounts themselves while operating in Houston.

Having a capable bookkeeper take care of the books may be quite advantageous because they have the knowledge to complete the task quickly and effectively and will act as a second set of eyes to spot mistakes and offer solutions as per laws and regulations in Houston.

Hiring Houston CPAs could be beneficial here as they will be updated about all the tax regulations, deductions, incentives, and other factors that can act as a favor or threat to their business. Whereas, trying to do everything by themselves is a drift as well since business owners are expected to put in their efforts at the right places at the right times.

Hiring a Houston CPA That Is Outdated

Although the fundamentals of accounting have largely remained unchanged for centuries, the way they are applied evolves constantly. A CPA who isn’t keeping up with industry developments, tools and technologies that can assist you to operate your business, changes in tax law, etc. puts them at a significant disadvantage. And if you choose to work with that out-of-date CPA, you will bear the penalty.

Make sure the Houston CPA you hire prioritizes professional development regularly. Not only the minimal number of CPE hours needed to maintain their license, but also proactive training and education to keep up with developments and trends in the sector.

Nearly No Tax Planning As Per Texas Laws

Taxes are one of many businesses’ largest outlays in Texas. If you want to free up money to expand your business or simply want greater earnings at the end of each month, lowering your tax burden should be a top focus.

There isn’t a single, universal tax strategy. What works for one person might not work for you. It relies on several variables, like your revenue, business structure, number of employees, and more. Finding the finest prospects ultimately boils down to talking about the specifics and taking a close look at your particular firm.

A CPA with knowledge in your industry is a smart place to start.

Ignoring Small Transactions

It’s simple to overlook the little token of appreciation you sent to a customer or the ream of printer paper you purchased on your way back to the office.

It’s crucial to document the transaction and obtain a receipt, regardless of how minor it may seem. You must be able to provide the IRS with proof of every business expense, no matter how minor, in the event of a tax audit.

Not Keeping Business Records Within and Outside Texas

It’s crucial to fully document your business operations for a variety of reasons, including the IRS, employment, business management, and financial forecasts. Expenses must be recorded, organized, and periodically checked for accuracy.

Small errors that go unrecognized and unfixed might end up costing the company money in the long term. Any prospective buyer would want to evaluate your financial records and your business procedures should you ever decide to sell your company. Additionally, a business’ capacity for growth can frequently be constrained by inadequate paperwork.

Conclusion

Your company’s financial health can make or break it. As a Houston-based business owner, other concerns may frequently take precedence over accounting. It’s crucial to keep in mind, though, that your accounting system is a crucial component of your company and needs to be viewed as a long-term investment. Your company’s success in Houston will improve if you tackle bookkeeping proactively!