Year-end Tax Planning: Get Your Accounting Records Ready for Tax Season
Whether you prepare your own taxes or rely on a tax service or CPA firm to get the job done, there are several things you can do to make the process more efficient and less stressful. As the end of the year approaches, here are some tips to help you get focused and organized.
Prior Year Adjustments
At the end of last year, did your accountant or tax preparer give you a list of adjustments? If so, make sure those adjustments have been recorded in your system. Based on last year's adjustments, you may have also been given some suggestions for ways to improve your recordkeeping. This is a good time to review those suggestions and confirm that you have implemented necessary changes.
Make sure all of your transactions are up-to-date and recorded in your accounting system including:
- Vendor invoices – all invoices need to be entered at year-end and any invoices your receive in the beginning of January that are dated in December should be recorded as well.
- Customer billing – All invoices for products sold or services provided as of year-end should be billed in the system.
- Prepaid expenses – Any prepaid expenses, for example prepaid insurance for the following year should be recorded as an asset.
- Depreciation – depreciation for the current year should be recorded and up-to-date
- Fixed assets – Any new assets purchased during the year should be recorded.
- Inventory – Whether you take a physical inventory at year-end, maintain a perpetual inventory system, or perform periodic cycle counts, ensure now that your inventory records are accurate and any adjustments for damaged, obsolete, and lost or stolen inventory are recorded. You should also have a record of any inventory removed for personal use.
Organize all supporting documentation so that you can gain quick access as you prepare your taxes or respond to requests from your tax preparer. Some examples include:
- expense receipts
- mileage logs and vehicle odometer readings
- customer invoices
- bank statements
- credit card statements
- employee records and Tax filings
- estimated tax payments
Review guidance from the IRS on recordkeeping requirements for small businesses to ensure you are doing all you can to be compliant: http://www.irs.gov/pub/irs-pdf/p583.pdf
Review all balance sheet accounts including assets and liabilities and ensure account reconciliations are up-to-date.
- All bank accounts should be reconciled to the bank statements and bad checks should be written-off. All bank fees and adjustments should be recorded.
- Any new assets such as equipment, buildings, leasehold improvements, vehicles, furniture and fixtures, and computers should be recorded as well as current depreciation recorded.
- Prepaid expenses should be reflected in the asset section of the balance sheet and typically require adjustments from prior year balances as the prepaid expense expires.
- Reconcile all loan balances to bank statements.
Payroll – Payroll reports including tax filings (941, 940, state taxes forms, etc.) need to be reviewed and provided to your tax preparer. Using a payroll service throughout the year to handle your payroll makes this area super streamlined.
Personal Expenses – Review expense account transactions to ensure you do not have any personal expenses recorded as business expenses. Any personal expenses should be closed to the owner drawing account or as directed by your tax advisor.
Miscellaneous Expenses – Review transactions recorded as miscellaneous expenses and reclassify them to the appropriate expense account. If you are not sure how they should be classified, make a list to go over with your accountant or tax preparer.
Fixed Assets – Have a list of all business assets purchased during the year ready including purchases of buildings, equipment, vehicles, furniture and fixtures, and computers. The list should include at least an asset description, date of purchase, and the total cost.
Questionnaire – If you received any requests for information from your tax preparer during the last few months of the year, take the time to respond. Many times this comes in the form of a client questionnaire and it is meant to assist both the tax preparer and the client during the busy tax season. The more information you provide as requested by your preparer, the more efficient the process will be.