I get this question a lot from business owners. It is actually quite common. Let me explain!
The net profit in your business is based on your revenue less your operating expenses. Basically, it’s the money you bring into the business (sales) minus the money going out of the business (expenses).
Let me give you an example.
When you started your business you invested $5,000 into it to open the business checking account. For 2020 you earned $20,000 in income, spent $3,000 in business expenses, and paid yourself $22,000.
Your #2020profit is $17,000 ($20K minus $3K). However, since you paid yourself $22,000 your cash has been depleted down to zero. Were you able to follow that?
Keep in mind….. you are still responsible to pay taxes on the net profit of $17,000.
This is why it’s so important to have a bookkeeper keep track of your cash flow.
If you haven’t tracked your business income nor expenses all year click HERE to schedule an appointment, so we can get you on track before #2020taxseason begins.