What kind of accounting system is needed for a new S corporation?

You need an appropriate accounting for any small business--and especially for a business that files a corporate or partnership tax return.

Furthermore, I promise you--you will miss business tax deductions and make dumb accounting mistakes if you use a shoebox for your S corporation bookkeeping or the shoebox's close cousin, Microsoft Excel.

Yes, Microsoft Excel is a great spreadsheet! But, sorry, Excel is a bad accounting solution...

Fortunately, while you do need a real accounting system for an S corp, you often don't need to go hog wild. In most cases, any simple bookkeeping program will do the job just fine.

Quicken Works Fine for Small Service Firms

For example, if you run a personal service business with less than $250,000 in revenue and assets, you only need to construct a simple profit and loss statement in order to prepare your S corporation tax return. Any decent checkbook program--including Quicken and Microsoft Money--will construct such a profit-and-loss statement.

Note: A profit and loss statement shows the revenues and expenses of the business--and then calculates the profit.

Tip: You probably want to get the Home and Business version of Quicken if that's the software program you choose.

Larger Businesses Need a Full-fledged Accounting Program

If your S corporation revenues or assets exceed $250,000 or your business buys and resells inventory, you will need a real small business accounting system.

The reason is that in this case you need to not only produce a profit and loss statement. You also need to generate a balance sheet (or bits and pieces from a balance sheet) for your tax return. Checkbook programs don't really produce balance sheets. But any small business accounting business software will. For example, QuickBooks, Freshbooks, Xero Accounting and Sage 50 Software for example all produce balance sheets.

Note: A balance sheet lists the assets and liabilities of the business. Assets include items such as cash, accounts receivable, inventory and fixtures and equipment. Liabilities include accounts payable, bank loans and taxes payable.

Tip: One advantage of using QuickBooks (and this advantage exists for any of its flavors) is that you'll find the program's ubiquity a real benefit: Tons of CPAs and bookkeepers know the program. Publishers have published all sorts of books on the program (including a bunch I've written), community colleges offer classes, and so on.

Remember to Arrange for a Payroll Solution

One other comment about the accounting system for a new S corporation: Remember that your new S corporation will need to do employee payroll. In fact, even if you the shareholder are the corporation's only employee, you will need to do payroll. You may, therefore, want to get an accounting system that lets you easily do employee payroll. (Another S corporation payroll option is just to use an outsourced payroll service such as ADP or PayChex.)

One other note: We do have a blog post (here) that describes an accounting "hack" you can use to do payroll for a one-employee situation in an S corporation. There's also an inexpensive e-book you can purchase and download.

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Additional Information You May Find Useful

If you want additional information about how to maximize the tax savings related to running a business or investment venture, you may also be interested in one of our downloadable e-books (see descriptions below). Each book covers a category of tax planning topics that easily save a business owner significant amounts of income or self-employment taxes (potentially thousands of dollars a year) and is instantly downloadable.

Often the best tax saving tool private companies have? The Section 199A deduction which allows them to avoid taxes on the last 20 percent of their income.

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Nearly secret, the federal government's employee retention credits provide tremendous payroll tax savings for most small businesses... A new book from our firm explains.

Info here