As this year ends, why not make a New Year’s business resolution and focus a marked effort to organize your company’s financials? If you plan all year long, when tax time comes, the meeting with your tax professional will be much easier and less stressful.
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Why We Put It Off
Across the United States, small business owners everywhere are probably busier than Fortune 500 CEOs! We don’t have assistants to assistants, lunch and golf dates—often we work so hard we find it difficult to even spend quality time with our families and friends.
The Small Business Administration (SBA) says in 2009 there were 27.5 million small business establishments in the United States. Although the SBA records include businesses with 500 employees or less, most are on the smaller scale and employ anywhere from two to less than 100 employees.
Being in charge of just about every aspect of your business takes up so much time, we often neglect (or put off) tax planning. Sure we get the tax guide from our CPA every year with fill-in worksheets to help us stay ahead, but how many of us really use those forms? We just don’t have the time!
Next year can be different if you make a conscious effort to change. Actually you may have to put in a little work at first but if you get organized, each month end will flow smoothly leading you to a stress-free tax time.
For small business tax prep, this guide assumes your small business uses some sort of accounting software such as Quickbooks, Quicken, industry-specific software, etc. Feel free to download and utilize a checklist to guide you on what tax professionals will request.
If, on the other hand, you use manual recordkeeping, I’ve offered up some great business tax checklists from professional accounting firms to help you stay on track at tax time and throughout the year. Use these checklists to begin your tax organization and ensure accurate recordkeeping of your financials. You can find the links to these checklists in the references section below.
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Let’s Talk Trial Balance
I don’t know about your CPA, but mine wants my year-end trial balance and access to my accounting software. They also ask for other items such as the year-end balance sheet and my final income and expense statement for the year, but the trial balance is where it’s at, so to speak. It’s a place where every debit and every credit you make to every journal or ledger eventually falls. What’s also nice about the trial balance is most accounting software programs will allow you to drill down into each account to see all the activity within the account for the entire year (or month).
Let’s think about that for a second. Say you have $5,000 in accounts receivables at year-end. That number sits there on your balance sheet but if you log in to your software, access the trial balance and explore this financial via a drill down, you might see $4,000 of those funds are past due from one vendor since the beginning of the tax year and the remaining $1,000 of accounts receivables are current. Did you even know that one vendor was so late? A little exploratory surgery into the trial balance will tell you a lot and it’s something you should take the time to review each month. Fix any errors and adjust the trial balance until it truly is accurate—and all the debits and credits balance.
This is goal number one. Make your trial balance your new BFF. At first, you’ll need to look at every account, but as the months progress, there will be accounts that have either very low or no activity and you should be able to spot what looks off, once you get used to your new BFF.
When your accountant tackles your tax return, they need to create a beginning balance sheet and an ending balance sheet in order to report your financial status correctly to the Internal Revenue Service (IRS). And, the ending balance they achieve will be the beginning balance for the following year.
To achieve this they will need a reliable list of your accounts receivables, accounts payables and other items you owe such as sales or payroll taxes and any operating expenses that remain payables or receivables at fiscal year-end. These can also be pulled from your trial balance but you should also be able to print out journals and schedules showing current assets and liabilities along with aging reports. An example of an aging report would show what is current and then what within the account is past due and by how many days such as 30, 60, 90 or 120+ days past due.
In fact, your controlled journals and schedules, once printed, also show account activity in and out throughout the year. These all help your tax professional determine the final balance sheet.
The amounts you owe on company credit cards or other business loans needs to be revealed. Again, your accountant will want the balance at the beginning of the year, purchases, credits and payments on the credit cards and payment made on loans or leaseholds including any interest paid.
Think of your taxes this way: If you've purchased or sold anything or have changes to any accounts, your CPA will need this information. Or, if you have given to charity or offered customer discounts on items sold, you need to account for these and let your accountant know as well.
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Trimming the Process Is a Science
I’ve mentioned above the typical items tax professionals will request but in order to make tax time easier by planning throughout the year, it’s essential you review your trial balance each and every month and if a number, debit or credit looks unusual to you, seek out the supporting documents connected to these entries.
If you make a promise to set aside a few hours each month to review your trial balance and ensure it’s correct, when it is time to meet with your CPA, it will be a much easier process.
In the business world, I’ve found good organization of supporting documents such as payroll, accounts receivables and payables is a necessary must to ease tax time prep. You can do this in a couple of ways. If your accounting software allows for scanning documents which are then connected to dedicated journal posts, do so. Or, if throughout the year, you dedicate a trusted employee to scan documents each month and save these files securely, you’ll have all you need to hand over to your accountant when the time comes. Finally, if a scanner isn’t an option for you, use an organized filing system. By organized, I don’t mean just create folders and insert documents in any order. Put the most current document in front and each year, take the time to refresh the files by taking out the old and preparing for the new.
You will never fear tax time again, but this year, mark dedicated times on your monthly calendar and plan to spend the necessary time on your financials, especially the trial balance. At first, it may seem to take up more time than you wish, but once you master what your financials contain, you’ll find the process goes much faster.