It’s officially tax season, and that means many small business owners are scrambling to clean up their books from the previous year in order to hand information over to their tax preparers. While some small business owners dread this time of the year, others have taken control of their books and are prepared. But what if this is your first year of doing business, or you have fallen behind?
We get a lot of calls from business owners who desperately need help getting their books into shape. While we’re happy to help, the time and costs involved can be significant. We always recommend putting processes into place to help you keep your books up to date throughout the year and automating manual data entry—but there are also some things you can do if you’ve found yourself in a position of needing to catch up on bookkeeping. Below are a few small business tax tips to help reduce the stress of tax season.
Ensure the accuracy of your small business bookkeeping
Depending on the tools you use to maintain your bookkeeping throughout the year, this may be a simple process or could cost you hours if you have fallen behind. It is important to ensure accuracy in the entries, and that everything is up to date.
Step 1: Reconcile your books
Reconciliation is accountant-speak for checking all of the transactions on your books against your bank and credit card statements. Every single transaction should be listed—ideally you’re pulling these directly from a bank feed with a direct cloud accounting integration. When you reconcile, you’re looking for any errors from the bank feed, as well as misclassified transactions. If you haven’t set up a bank feed, you can add it to your bookkeeping platform and pull in past transactions to save yourself from doing a lot of tax-season data entry.
If you’re a Xero user, you can set up rules to properly classify transactions as you reconcile. You’ll also need to reconcile loan accounts. Ensure the principal and interest portions of each payment are properly classified (principal goes against the liability on your balance sheet, while interest is an expense). Don’t forget to check for uncleared bank checks and record them appropriately.
Step 2: Record individual fixed assets
Any asset over $2,500 should be recorded in the appropriate asset account. You’ll also need to calculate depreciation and make the corresponding journal entry. If you purchased any new assets in the past year, you’ll need to work with your CPA to determine the appropriate depreciation schedule.
Step 3: Update expense accounts
In step 1, when you reconciled your transactions, you probably spent some time classifying expenses. Double-check those expense accounts to ensure the expenses listed under them are classified correctly, as well as to make sure you don’t have expenses that should actually be categorized as assets.
Meals and entertainment expenses are an area where we’ve seen a lot of mistakes and confusion over the past several years—in large part because the tax treatment of these expenses has changed significantly. The COVID-19 Relief Bill that passed at the end of 2020 allowed 100% deductions for meals in 2021 and 2022. As you’re cleaning up last year’s books, ensure you have the proper meals and entertainment expense categories. Note that this deduction reverts back to 2020 rules in 2023 (most of these expenses will only be 50% deductible).
Finally, look through your categories to ensure nothing is classified as miscellaneous, suspended, or uncategorized. Searching for those categories is a quick and easy way to find any expenses that need a more specific home.
Step 4: Pull payroll reports
Pull payroll reports for the year, and make appropriate entries to split wages and taxes. The amounts listed on your books and payroll reports should match. A payroll summary will show your total gross wages, the employer portion of the payroll taxes, and any contributions made throughout the year. These are the amounts that should be listed in your expense accounts on the income statement. Make a journal entry to adjust as needed.
While you are doing this, take the time to file and provide all contract workers with 1099s. It is important to understand the difference between contract workers and employees, how they are paid, and when you are required to file a 1099 as this will affect your taxes.
Additional small business accounting tips for a smooth tax season and beyond
There will be many documents, incoming and outgoing. It is important to prepare for tax season by getting organized before you have an influx of mail. If you utilize a cloud-accounting app, a lot of this organization will be automated and safely stored in the cloud. If you are taking deductions and credits that require documentation, have that on hand. One example is business expenses. Keep receipts and invoices in case of an audit, or provide these documents to your tax preparer. Expensify is a great app to help business owners to stay organized with business expenses using their smart scan tool, eliminating the need to manually enter and keep paper receipts.
Don’t mix business and personal
Stay ethical. Don’t push the boundaries, and always separate business finances from personal. It may be tempting to consider something a “business expense” when in reality it is for personal use. Maintain separate personal and business accounts and always treat them as such. When in doubt, consult a trusted CPA to determine whether a questionable expense truly qualifies as a deduction.
Work with a trusted tax preparer
Much of the tax-season stress can be mitigated by working with an experienced tax professional. Having a business CPA prepare your taxes can prove to be a valuable resource, well worth the cost. In most cases, an experienced CPA can help uncover missed opportunities, such as credits, deductions, and last-minute tax-saving opportunities that you have overlooked had you filed on your own. Most importantly, a business CPA will be well-versed in the ever-changing tax codes in the area in which you do business.
Adopt a cloud-based small business accounting platform
If you aren’t already utilizing cloud-accounting apps, the time to start is now. Adopting cloud-accounting tools can significantly improve business accounting processes, resulting in a stress-free tax season for small businesses. We recommend consulting with a cloud accountant to determine which apps are right for your unique business.
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The team at FSA has decades of experience working with business owners and preparing taxes in a wide range of industries. We work with our clients using a team-based approach, which enables our clients to have industry experts on their side. Want to see what a financial expert can do for your business beyond tax season? Review the many benefits here.