What You Can Do Now to Make Tax Time More Tolerable
We know tax time for a business owner isn’t exactly one we look forward to. It can come with unexpected costs in taxes owed as well as a serious amount of busywork if you haven’t been keeping up on your bookkeeping throughout the year. Once your taxes are filed and you get a chance to “de-taxify”, it is a good time to evaluate what can be done better in the current year to make tax season easier on you.
Read on to learn a few things you can do throughout the year to stay on top of your business bookkeeping so you’re prepared come tax time. Then, when your accountant asks for various tax prep items, you’ll be ready. And while tax season may never be a time to look forward to, it helps to know what to do now so you are prepared for what’s ahead.
RECORD TRANSACTIONS MONTHLY
The meat of any good set of books is accurately categorized transactions. We recommend you categorize all your business transactions monthly, thus staying on top of your finances. Using a bookkeeping software like QuickBooks Online (QBO) can ensure all your transactions are in one place, thus making it easy to assign your transactions to the right accounts.
You can connect your business bank accounts to the software and see all your transactions come into QBO’s bank feed. This includes transactions like income, expenses, and distributions (like owner’s pay). When they populate into the bank feed, you will then need to categorize them to the right account such as Consulting Income or Software Subscription Fees. You’ll want to make sure each transaction is assigned to its proper account, thus officially adding it to your books so that it will show up on the monthly reports you run. More on that later.
Once you have categorized all transactions, you want to think about any transactions that weren’t captured. Did you use a personal card to cover some business expenses? It happens. If you are accumulating a list of these expenses, simply track them using an excel spreadsheet (or even a Ziploc bag). Include the company or person the expense was paid to, type of expense, date, and amount. Your accountant will need to perform a journal entry to manually add these expenses, and they can easily do this if you have a neat little list prepared for them at month-end or quarter-end.
RECONCILE ALL ACCOUNTS
Once your transactions have been entered into your books, you will want to reconcile all business accounts. Reconciling may sound complicated, but it is simply the process of comparing the transactions in your bank accounts to the transactions in your software. It is designed to make sure all transactions were properly recorded in your books.
It is an essential process for eliminating many of the common errors that happen during the month. It is like balancing your checkbook (did we just date ourselves)? This is definitely a process you want to keep up with. When you wait to do all twelve months at once, you still have to reconcile one month at a time, so it’s best to do this process monthly.
If you are using a bookkeeping software there should be a function that allows you to do this. In QuickBooks Online, you simply go to the Gear Icon and then click on Reconcile. Remember that you will need to reconcile all accounts. This includes bank accounts, savings accounts, lines of credit, credit cards and even PayPal and Stripe accounts that pertain to your business.
MAKE REAL-TIME ADJUSTMENTS
This may be something that your bookkeeper or accountant takes care of for you or at least talks over with you, but these items are good to be aware of, especially if you are handling the monthly bookkeeping yourself.
If you are selling products as part of your business, you will most likely want to do a quarter-end physical inventory count. Some business owners wait until year-end to do this count, but we actually recommend a count at the end of each quarter to keep reports more up-to-date (and to help with quarterly tax payment calculations). This is especially important for small businesses since you are typically not tracking your inventory in real-time.
Once you do a physical count and provide those numbers to your accountant, this is the point in which your books are adjusted and accurate Inventory and Cost of Goods Sold numbers are recorded into your books. It is important to note that your profit & loss and balance sheet reports will not be accurate until these adjustments are made. To prepare the necessary information for your accountant, you will need to do a count of all inventory on hand, apply a cost to each item counted, and then give that info to your accountant to record in the books.
Another common adjustment is for Bad Debt. If you have invoices that you know will not be paid, those need to be adjusted in the books. Let your accountant know what invoices will not be paid so they can record an adjustment. This can also be done quarterly.
One last common deduction is depreciation. Your tax accountant will calculate this for you, but you want to make sure you have any assets recorded in your books (or at least have a list). These are typically items over $2,500 in cost that will be used over a period longer than a year. Examples might be large furniture, equipment or computers. Depreciation is typically calculated at year-end, but you can be prepared by making sure you keep an ongoing record of your assets.
STAY ON TOP OF HOME OFFICE EXPENSES
If you are a business owner that works from a home office as your principal place of business you may be able to take a home office deduction. There are rules around when you qualify for this deduction so make sure you read up on this one or ask your accountant.
If you do qualify, you will need to provide your tax accountant with a list of rent costs, utilities, renter’s or homeowner’s insurance, and expenses that pertain to your office like repairs or cleaning costs. If you are a homeowner, depreciation of your home and mortgage interest will factor into the calculation, so you will want to collect information related to those pieces. You will also need to know the square footage of both your office and your entire home. This will help your accountant calculate your deduction.
This deduction will be calculated at year-end, but we recommend that you track your home office expenses as they occur so you don’t have to spend time compiling this list at year-end.
BE PREPARED FOR 1099 PREP
You may be required to issue 1099s to your contractors or vendors at year-end. Basically, 1099s must be filed to both the vendor/contractor and the IRS for anyone in which you pay at least $600 for services they provide. There is a bit more to this and there are exceptions, so make sure you understand the requirements around the issuance of these important tax forms. There are two things you can do to be prepared for tax time as it pertains to 1099s.
One is to set up vendor files for all new vendors in your bookkeeping system, and always request a Form W-9 prior to payment. A W-9 contains all of the information you will need to fill out the 1099 for that vendor at year-end. You can enter the information directly from the W-9 into the vendor file and you can attach the form within the vendor file so that it is ready for you come tax time.
DO A FINAL REVIEW OF YOUR REPORTS
This step is important. We always recommend that our clients do a thorough review of their Profit & Loss Report as well as a Balance Sheet monthly. Even if you have a bookkeeper, you want to look at these reports closely. You are the most in touch with your business, which makes you the best one to do the final review.
These reports should be easy to run using your bookkeeping software once the above steps have been done. Make sure you run the report for the month and you may want to look at a year-to-date version as well (set this using the date range field). Also, be sure to select the appropriate method of accounting. There is a dropdown box to choose cash or accrual for the accounting method. If you don’t know which method you use ask your accountant, but many of you will be cash-basis tax payers unless told otherwise.
After you pull up a report, it is time to dig into the details. In a software like QuickBooks Online, you are able to click on each number to see the detail that makes up the amount. This way you can investigate anything that looks unusual to you. We always recommend that you review total income and total expenses in detail at the end of each month. Staying on top of your reports monthly will ensure that you don’t have to spend countless hours on clean-up at year-end.
If tax time feels stressful for you, know that you’re not alone. We hope that these tips give you a solid start. If you need a bit more support, an hourly support session may be just what you need. Proper training can make all the difference if you’re going to handle your business bookkeeping on your own.