Rockel Bookkeeping

Martin County, Florida Bookkeeping Services

Tax Prep Bookkeeping Tips

Tax Prep Bookkeeping Tips

These tax prep bookkeeping tips will help you get your small business records up to date for the whole year, with the goal to have a smoother process come tax time.

Whether you use a CPA or file your own self-employed taxes, you can work through these tips and checklists.

At the end of the fiscal year, your CPA will probably give you a list of things they need you to do and documents they need you to provide, but if they haven’t yet, you can use this page as a guide of what to start on. If you’re just starting to prep now, feel free to use what you can from below for your 2020 taxes, but hold onto this information to use later this year so you’re ahead of the curve for your 2021 taxes.

1.   Reconciliations – The best thing you can do for your bookkeeping and taxes is to reconcile your bank accounts and credit
cards in QuickBooks throughout the year. A reconciled account that can be confirmed with a quick check of the bank statement does a lot of positive things for your business. A properly reconciled file tells your tax preparer that all transactions should be there and nothing should be duplicated, so they will just need to make sure everything is in the right spot. Whether you work on reconciliations throughout the year, or cram it in just before taxes, you’ll need to look at all the transactions that have flowed through your linked accounts to determine which were business-related, and which ones were personal. If you have a bookkeeper, they may do some of this for you. Having your CPA
handle these tasks on top of your taxes can cost you a premium if they go through all your information, and if they don’t, you risk missing out on deductions that could reduce what you owe. Also, if you hand your CPA a QuickBooks file that is not reconciled you may need to have an extension filed, which just draws out tax time even longer. Anyway, start by making sure you reconcile ALL accounts, not just bank accounts. Reconcile all of these:

  • Credit Cards
  • Loans
  • Lines of credit
  • Payroll liabilities
  • Bank accounts
  • Asset accounts

Once you have these reconciled, you should run a trial balance to check that debits equal credits across your accounts. This is also a great way to check for anything that looks out of the ordinary. Follow this up by making adjusting journal entries for any depreciation expenses or fixed asset purchases (if you know how, otherwise your bookkeeper or CPA should be able to help), and you should be ready to generate and review your company’s year-end financial statements.

As a side note: If you’re still using the same bank account for both your business and personal finances, I can’t stress enough that your                     business should have at least one dedicated account, and business and personal should be separate.

2.   Accounts Receivable & Accounts Payable, Undeposited Funds – Maintaining clean Accounts Payable and Receivable, and Undeposited Funds is something I also recommend doing throughout the year to keep them manageable. However, if you haven’t been
keeping up on them, giving them a tune up before you hand things over to your CPA is always a good practice. 

When it comes to cleaning up your end-of-year accounts, the best place to start is with source documents like receipts and invoices. Whether you work with physical files, or you’ve switched to a paperless system, you’ll still need to make sure all your records are accounted for. Then, running your Balance Sheet for the last year is a great next step. Do your Receivables or Payables look too high? Do you have thousands or even tens of thousands in Undeposited Funds? The most common issue I see is not posting customer payments to their outstanding Receivables (invoices). The most obvious red flag for this is when you know you’ve deposited all your customer checks but have a high balance in Undeposited Funds. Looking over your Payable and Receivable aging reports can also be a great tool to show if you’re behind on paying your suppliers or anyone is behind on paying you, or if your transactions haven’t been properly linked.

Accounts Receivable Checklist

  • Go through your customer accounts to check that you’ve created and sent, logged, and stored invoice copies for all completed services, projects, and orders.
  • Separate out invoices that haven’t been collected on. This will help determine if any of them need to be written off as bad debt.
  • If you have time before the end of the year, try and collect your outstanding receivables from customers with overdue invoices.

Accounts Payable Checklist

  • Go through your vendor accounts and follow the same procedure as Accounts Receivable for your open Payables.
  • Unearth any unpaid bills to ensure they get paid before you close out your year.
  • If there are any suspicious balances here, request statements from those Vendors showing what you owe.

3.   Asset Review Take a peek through the details of your Asset accounts by looking at your Balance Sheet. These should generally include large purchases of things like buildings, vehicles, equipment, etc. If you see small purchases in any Asset accounts, these should most likely be moved to an Expense account.

4.   CPA Review Before Year End Taxes- You need to do a year-end tax review with your CPA to get an estimate on your tax
liability. Why would you go through all the trouble of getting ready for your taxes without getting an early idea of what you may owe? For most business owners, at least part of the dislike for tax time is the unknown and working with your CPA at this crucial time can help shed some light. You need to review your taxes with your CPA prior to year-end for two important reasons:

  1. You may have more options for deductions at the end of the year as opposed to waiting until the calendar turns to a new tax year.
  2. If you’re going to owe, wouldn’t you rather have a few months’ notice over just a few weeks?

We all hate getting hit with unexpected bills and taxes should be treated no differently. To give you an even bigger leg up for next time, you can set aside a percentage of your income for taxes throughout the year in a separate account. It’s great cash flow management to prepare ahead of time instead of possibly having to come to an agreement with the IRS on a payment plan, which would impact your future profits.

5.  Have a Tax Plan in Place– When you avoid your bookkeeping duties for too long it can take a hefty investment of both time and money to help set them right. Closing out your books at year end is mainly about making sure every financial transaction related to your business operations have been accurately recorded. It sets you up for success by allowing you to regularly look at accurate financial reports to see where your company stands, but also gets you ready to file your tax return. Working with the right bookkeeping professional can help you accomplish both of those goals with minimal time spent on your part.

Among other things, timely accounting habits keep your business on track financially and legally by helping you avoid cash flow management issues, interest charges, late fees and overdraft penalties, tax penalties and unnecessary audits, missed tax deduction opportunities, and the inaccurate tracking of profits and costs that leads to unhealthy business decisions.

The easiest way to wrap up one fiscal year and get ready for the next is with a systematic approach to getting your books organized. Follow these simple steps and bring your CPA a clean set of books. They’ll be impressed, and you’ll sleep easier knowing this is one huge task off your plate.