It's inevitable that tax season is coming, and soon, no matter how busy you are with other aspects of your business. Getting your books tax-ready is a must to make sure you’re compliant with IRS recordkeeping requirements, and don't have any late fees or surprises later, just an accurate tax return that won’t cost you extra time or money. This guide will help you get through your bookkeeping backlog.
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Collect Accounting Records: Receipts, Invoices, etc.
Collect all receipts and invoices related to your business expenses. There are different types; here are some of the most important ones:
Customer Invoices
Review your customer accounts and double check that you’ve collected all customer invoices for the tax year. Depending on whether you’re using a cash or accrual method, you’ll record them differently.
Debt Collections
Review your customer accounts for any bad debt expenses. In order to deduct the cost of bad debt from your tax return, you will need to prove to the IRS that you have taken reasonable steps to collect the debt. Bad debts can be claimed by using either the specific charge-off method or the nonaccrual experience method.
Business Expense Receipts
Gather your receipts from all business purchases you made during the year.
Vendor Invoices
Review your vendor accounts to ensure that you have paid them all in full. Make sure you have a copy of every bill from each vendor activity and, if you don’t, contact the vendor and ask them to send you a copy. Note: Vendor accounts include bills for business activities still currently operating in your business’s closing period.
There are accounting solutions that offer catch up bookkeeping services so you don't have to do it on your own. Bench Accounting can get you up-to-date with their Historical bookkeeping services, Catch Up and Retro. Their bookkeeping teams will work with you to get your books in order fast. Pricing for historical bookkeeping starts at $299/mo. Read more on their website.
Reconcile Bank Accounts
Reconciling your bank accounts accomplishes two things:
1) Helps you to not miss business expenses or important records
2) Catches mistakes your bank or you may have made.
You can do this by comparing transactions from your bank statement with the transactions in your company accounting records, either within your software if you it, or in Excel or a sheet of paper. If the transactions don’t match, identify and fix any errors so they balance. Depending on the accounting software you use, there may be tools built in to help you reconcile.
Separate Personal and Business Expenses
Keeping your personal and business expenses in the same account is known as "piercing the corporate veil" and could result in you being held personally liable for your business’s debt and actions. The sooner you separate your business and personal expenses, the better. If you’re uncertain whether a purchase qualifies as a deductible business expense, there are resources to help you learn how the IRS differentiates personal and business expenses.
Open a small business bank account and keep your finances separate. If you are having problems with getting a business account, you're not alone; too many people have had such a rough time during the pandemic. There are options if you've been turned down. For example, if you're dealing with Chexsystems, a few banks, including Chime, won't run a ChexSystems report when considering you.
Create Digital Records
If you haven’t already, there are countless benefits to making your business paperless. As you process your paperwork, create digital records of receipts and important documents. Here are a few tools to check out:
Shoeboxed
They can send you a postage-paid Magic Envelope™ box; you'll put your documents in it and send it back for free. You can use their mobile app for fast uploads; email pictures of your receipts; drag and drop them from your desktop; or use their custom Gmail plugin to auto-import receipts from your email account. You can also migrate your documents to them from their Neat Receipts® desktop application with a zip uploader. They scan everything for you. You'll see the most important data from your receipts in one organized place for at-a-glance expense tracking and can click into the expense to see the fully scanned image. You can create your own categories or keep there's and export all of your data at any time, including the scans of your receipts. There is a 30 day free trial.
Pricing: Individuals and freelancers plans start at $22/mo. billed monthly, for the first 6 months.- Visit their website
FileThis
Link FileThis with your online accounts and it will securely fetch your online statements, bills and documents for up to the last three years, then new statements when you're ready, and deliver them to either a secure FileThis Cloud or your PC or cloud storage (Evernote, Dropbox, Google Drive, etc.)
Pricing: Free (household levels), Premium $2/mo and Ultimate $5/mo. Visit their website.
Evernote
Evernote is a well-known note-taking app with a ScanSnap Scanner you can use to scan documents with your phone's camera and keep them accessible across all your devices. If you already use Evernote it may be worth thinking about.
Pricing: Free (limited); Personal $7.99/mo, and Professional/$9.99 mo (they have options as well for teams). Visit their website.
Submit Forms for Contractors & Employees by Deadlines
If you paid independent contractors and/or employees during the tax year, you’ll likely need to file the following Information Returns:
Independent Contractors: Form W-9 & Form 1099-MISC
If you paid an independent contractor more than $600 for work during the year, you’ll need to submit a Form W-9 and a Form 1099-MISC. A W-9 requests a contractor’s taxpayer information. The contractor completes this and returns it to you. You then use the information on the contractor’s W9 to issue a 1099 to the IRS. If you’re new to the process, and unfamiliar with the deadlines, read How (and When) to File a 1099 first.
Employees: Form W-2
You’re required to file Form W-2 for all employees.
Review Your Books With a Professional if Possible (or Necessary)
When you’re a small business owner, doing it yourself is often the least expensive option. It may be worth it to hire a tax professional to help you eliminate errors and claim all the deductions available to your business, which may end up saving you money in the long run anway. Some tax professionals can also represent you in the event of an audit. Networking and developing professional relationships with financial professional before you need their help can prevent last-minute scrambling and bring you peace.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. No liability is assumed for actions taken in reliance upon the information contained herein.