Tax season does not have to begin with a frantic search for receipts, unanswered questions from your accountant, and hours spent trying to remember what happened six months ago.
For small business owners, an easier tax season starts with accurate, up-to-date bookkeeping.
When your books are clean before they reach your tax professional, you can spend less time fixing old transactions and more time making sure your return is based on reliable financial information. Better yet, the work you do now can improve your financial visibility long after tax season is over.
Use this small business tax preparation checklist to get your books organized, identify problems early, and give your CPA, EA, or tax preparer what they need to do their job efficiently.
January: Close Out the Previous Year
1. Make Sure Every Transaction Is Recorded
Start by reviewing the previous year’s bookkeeping. Confirm that income and expenses have been entered and properly categorized.
Pay particular attention to:
- Bank and credit card activity
- Business income
- Payroll transactions
- Loan payments
- Owner contributions and distributions
- Major equipment or asset purchases
- Business expenses paid personally
This is also a good time to identify transactions sitting in uncategorized or suspense accounts.
Accurate books do more than prepare you for taxes. As we explain in Bookkeeping Cleanup: How Clean Books Help Your Business Grow, reliable financial records give you better information for running the business throughout the year.
2. Reconcile Your Accounts
A Profit & Loss statement can look perfectly reasonable and still be wrong.
Bank and credit card reconciliations help confirm that the activity recorded in your bookkeeping system agrees with the actual account statements. They can uncover duplicate transactions, missing expenses, incorrect balances, and other problems before those errors make their way into your year-end financial reports.
At minimum, reconcile every business bank and credit card account through December 31.
3. Review Accounts Receivable and Accounts Payable
Look carefully at what your customers supposedly owe you and what your business supposedly owes vendors.
Are there old invoices that were actually paid? Duplicate bills? Customer balances that are no longer collectible? Vendor credits that were never applied?
Cleaning up accounts receivable and accounts payable helps make your year-end Balance Sheet more meaningful and gives your tax professional better information to work with.
It can also expose cash flow problems worth addressing before another year gets underway. For more on that distinction, see Cash Flow vs. Profit: What Every Business Owner Needs to Know.
January: Handle Year-End Payroll and Information Returns
4. Verify Contractor Information
If you paid independent contractors or certain vendors during the year, review your vendor records to determine whether information returns may be required.
Make sure you have completed Forms W-9 on file when appropriate. Verify names, addresses, tax identification information, and payment totals before filing deadlines arrive.
The rules governing Forms 1099 can change, so don’t rely on an old dollar threshold or assume that every vendor is treated the same way. Your bookkeeper can help organize payment records, while your tax professional can help determine the filing requirements that apply to your business.
5. Review Payroll Records and W-2 Information
If you have employees, verify their names, addresses, Social Security numbers, wages, and withholding information before year-end payroll forms are finalized.
Payroll discrepancies are much easier to resolve before forms are filed than after an employee discovers an error.
If your payroll runs through a third-party provider, don’t assume that means you can ignore the process. Review the reports and make sure they agree with your bookkeeping.
February: Build Your Tax-Ready Financial Package
6. Review Your Profit & Loss Statement
Your Profit & Loss statement shows what your business earned and spent during the year.
Instead of simply printing it and handing it over, review it critically.
Do the revenue numbers make sense? Are any expense categories unusually high or low? Are large purchases sitting in ordinary expense accounts when they may actually be assets? Are personal transactions mixed into the business?
This is where clean bookkeeping becomes especially valuable. Your bookkeeper doesn’t determine the tax treatment of every item, but accurate categorization gives your tax professional a much better starting point.
7. Review the Balance Sheet
The Balance Sheet is one of the most overlooked reports among small business owners, but it can reveal problems that never appear on the Profit & Loss statement.
Review:
- Bank balances
- Credit cards
- Loans
- Accounts receivable
- Accounts payable
- Fixed assets
- Payroll liabilities
- Sales tax liabilities
- Owner equity accounts
If a Balance Sheet account doesn’t make sense, investigate it before sending the reports to your tax preparer.
Our Financial Health Check-Up for Small Business Owners explains how these reports work together to give you a clearer picture of your company’s overall financial position.
8. Gather Supporting Documents
Your tax professional may need information that doesn’t live inside your bookkeeping software.
Depending on your business, that could include:
- Loan statements
- Asset purchase documents
- Vehicle and mileage records
- Payroll reports
- Prior-year tax returns
- Estimated tax payment confirmations
- Inventory records
- Business-use documentation
- Forms received from banks, lenders, payment processors, or other parties
Keeping these documents organized throughout the year is considerably easier than reconstructing them during tax season.
March: Fix Problems Before They Reach Your Tax Preparer
9. Conduct a Year-End Bookkeeping Review
Before your books go to your CPA, EA, or tax preparer, give them one final review.
This is different from a formal financial statement audit. For most small businesses, what you need is a bookkeeping cleanup or year-end review designed to identify obvious inconsistencies and incomplete records.
That may include:
- Reviewing uncategorized transactions
- Correcting duplicate entries
- Checking reconciliations
- Reviewing loan balances
- Identifying unusual account balances
- Verifying payroll activity
- Reviewing accounts receivable and payable
- Making sure year-end reports are complete
If your books have fallen behind, don’t simply hand the mess to your tax preparer and hope for the best. A professional bookkeeping cleanup can often resolve those problems before tax preparation begins.
10. Give Your Tax Professional Time to Ask Questions
One of the best ways to make tax season harder is to wait until the filing deadline is approaching before sending over your records.
Once your bookkeeping is complete, provide your tax professional with the requested reports and supporting documents as early as reasonably possible.
That leaves time to answer questions, locate missing documentation, and correct bookkeeping issues without creating an unnecessary emergency.
April and Beyond: Don’t Start Over Again Next Year
Filing the return shouldn’t be the end of your financial process.
Once tax season is over, use what you learned to improve your systems for the rest of the year.
Were receipts missing? Were contractor records incomplete? Did you discover that months of transactions had never been reconciled? Did your tax bill catch you by surprise?
Those aren’t just tax-season problems. They’re signs that your bookkeeping procedures may need attention.
Build a Better System for the Coming Year
Consider establishing a regular monthly process for:
- Reconciling accounts
- Reviewing financial reports
- Following up on receivables
- Monitoring cash flow
- Maintaining vendor documentation
- Reviewing payroll
- Setting money aside for taxes
Our guide to Streamlining Your Small Business Procedures for the New Year provides a good starting point for building those routines.
Your Bookkeeper and Tax Professional Have Different Jobs
One of the most useful things a business owner can understand is the distinction between bookkeeping and tax preparation.
Your bookkeeper maintains the financial records that show what happened inside your business. Your tax professional uses those records, along with other information, to prepare the appropriate tax filings and provide tax advice.
When those two functions work together, tax season becomes much easier.
At Serenity Solutions, we focus on keeping your financial records accurate, organized, and useful throughout the year. That means your books aren’t something you scramble to reconstruct every spring. They’re a financial management tool you can actually use to run your business.
Clean Books Make for an Easier Tax Season
The best time to prepare for tax season isn’t April.
It’s all year.
Consistent bookkeeping gives you better financial reports, helps identify problems sooner, and makes it much easier to provide accurate information when your tax professional needs it.
If your books are behind, inaccurate, or simply not giving you confidence in the numbers, Serenity Solutions can help get them cleaned up and tax-ready.