As the accounting year-end approaches, many business owners ask how they can lower their accounting and tax prep bill. The quick answer is: do as much as you can before you send the info to your tax accountant. Many business owners would do this if they knew where to begin. Here are some insider tips.
Tax accountants start with the company balance sheet.
They look at every balance sheet account and ask whether the account is accurate; and what support there is to verify the balance. They know, and you should too, that if cash is reconciled and all the balance sheet accounts are reconciled or “tied out” to supporting records, then the profit or loss for the year is also correct.
16 Essential Year-End Accounting Tasks
Here are the year-end accounting tasks to do before sending the accounting records to your tax preparer. Show this list to your internal accountant or outside bookkeeper.
1) Match prior year accounting ending balances to the prior year’s tax return.
Each year, after your tax return is finished, record any adjustments your tax preparer made. Then, lock or “close” the year in your accounting software so you don’t accidentally change these numbers.
2) Reconcile your bank account.
Remove old outstanding checks and deposits in transit. Your bank balance in your accounting software should equal the book balance in the bank reconciliation. Utilize the QuickBooks reconcile function, where applicable.
3) Clean up your accounts receivable.
The accounts receivable balance is erroneous when there are client balances that are no longer collectable, credit memos that have already been utilized, and transactions that have been accidentally recorded twice. This affects all accrual basis taxpayers. Even if you are a tax or cash basis business, adjustments in accounting software packages can sometimes affect the cash basis accounting records if things are really messed up.
4) Ensure that fixed assets are not coded to expense accounts.
Reclassify additions to the balance sheet accounts. Put a capitalization policy in place. Expense small asset purchases and depreciate large asset purchases.
5) Reconcile credit card balances to the statement balances at year end.
If the statement period ends mid-month reconcile the January statement to ensure that the December 31 balance is accurate.
6) Reconcile all loans payable at year end to the bank statements.
Be sure to record interest paid.
7) Sales tax paid in January should show up as a payable on the balance sheet at year-end.
8) Record all business expenses paid personally.
Business owners work very hard. They should never miss a deduction. All deductions must be reported in the year they occur. Remember that you can carry losses back or forward. Clearly identify all deposits from owners’ personal funds to the business and withdrawals by the owner to their personal accounts.
9) Reconcile payroll as reported on the W-2s to the payroll general ledger accounts.
Wage expense, payroll tax expense, and any payroll liability accounts in your accounting software should all agree to the payroll reports.
10) Shareholder/owner W-2s for S-Corporations should report health insurance paid by the company.
This is a benefit that is subject to income tax but not subject to Social Security or Medicare taxes. Because the health insurance is being paid by the company this is a non-cash payroll transaction that is reported to your payroll processing company.
11) Even up distributions between owners to the correct percentages when you have an S-Corp, LLC, or partnership.
For example, S-Corp owners who each own 50 percent of the business must have equal owner distributions.
12) Record your profit-sharing contribution payable, if you know what it will be.
13) Ask your accountant for a projected depreciation number and record this amount.
The number will probably change but it will give you better numbers to work with when you look at your financial information.
14) Be sure that receivables/payables between related-party businesses agree.
A related-party business can include a partnership that reports the accounting for the building and an S-Corp that reports the accounting for the actual business. If Company A owes Company B $20,000, then the amount recorded on both company’s books should agree.
15) Communicate with your tax preparer during the year.
Ask questions and let them know about changes to the business (such as buying/selling a building, ownership changes, new states to do business in). A five-minute phone call in June frequently saves a lot of time during tax time. If you have questions in your “Ask My Accountant” or suspense account, ask your accountant how to record the transaction before you give them the information. Don’t wait until tax time. You will be more efficient if you ask early on.
16) During the year, run monthly and quarterly reports from your accounting software.
Really look at the numbers. If they don’t make sense, contact your accountant and explain the situation. This way the problem can be solved before it gets too large. A little time during the summer months spent fixing the accounting data will frequently save a lot of time and money during tax time.
Cleaning up accounting records for year-end is a win-win situation.
Business owners benefit form improved accuracy in their own internal accounting records.
Accurate internal financial statements help business owners make better business decisions. Tax accountants are able to prepare business tax returns efficiently and more economically when the records are accurate. Follow these 16 steps at year-end and you will have sweet results.