As the end of the year approaches, business owners have a lot on their plates. In addition to managing daily operations and planning for the year ahead, they need to ensure their financial records are in order for year-end reporting and tax preparation. Properly organized finances not only make this process more efficient but can also help save money by ensuring you take advantage of all available deductions and credits. In this blog, we’ll explore some essential tasks business owners can perform to get prepared for year-end reporting and tax season.
1. Categorize Transactions:
The foundation of sound financial record-keeping is categorizing transactions accurately. Throughout the year, you should regularly categorize your income and expenses into relevant accounts. This step helps you maintain a clear picture of your financial performance, making it easier to track profitability and identify areas where you can cut costs. Popular accounting software like QuickBooks, Wave or Xero can simplify this task significantly. If you are brand new and your transaction volume is really low-a spreadsheet can accomplish the same goal.
2. Reconcile Bank Accounts:
Reconciliation is the process of comparing your financial records with your bank statements to ensure they match. This step helps catch any errors, missing transactions, or potential fraud. Reconciling your accounts on a regular basis (monthly, at a minimum) can save you from a lot of stress at year-end. It’s a good practice to reconcile all accounts, including checking, savings, credit cards, and any business loans or lines of credit.
3. Review Outstanding Invoices and Expenses:
Make sure you’ve accounted for all outstanding invoices and expenses. Chase down any unpaid invoices, and record any outstanding bills or expenses you’ve incurred but haven’t paid yet. This will ensure that you accurately represent your income and liabilities at year-end. We have talked in the past that utilizing accrual method of accounting is usually best for book purposes, even though for tax purposes most small business owners will utilize the cash method, where they will claim income and expenses when actually collected and spent.
4. Mileage and Travel Expenses:
If you or your employees travel for business purposes, you need to keep track of mileage and travel-related expenses. Use a dedicated app or logbook to record each trip’s details, including date, purpose, mileage, and associated expenses. This information is crucial for deductions and expense claims.
5. Document Out-of-Pocket Expenses:
Small out-of-pocket expenses can quickly add up, but they are often forgotten if not documented. Keep all receipts for business-related expenses, even if you pay for them personally. These can include office supplies, meals with clients, or travel expenses. Maintaining records of these expenses can help lower your taxable income.
6. Asset and Depreciation Records:
For significant purchases, such as equipment or property, it’s essential to maintain records of these assets, such as cost and date of purchase, and date put in service. Your accountant can provide guidance on the best way to depreciate assets for tax purposes.
7. Inventory Management:
If you carry inventory, take a physical count and reconcile it with your records. This is crucial for calculating the cost of goods sold (COGS) and ensuring your financial statements accurately reflect the value of your inventory.
8. Gather Financial Statements:
Year-end reporting and tax preparation will require comprehensive financial statements. At a minimum you should have a detailed list of your income and expenses. If you already use accounting software, you will likely need to provide a profit and loss statement, and a general ledger report. For business returns, you will also likely need to have a balance sheet prepared, if it doesn’t already come out of your accounting software.
9. Ensure your vendor information is up-to-date:
If you pay vendors for services, make sure you have record of their W-9, and have good records on how much you paid each vendor. These records will ensure smooth 1099-NEC issuance in January.
10. Consult with Professionals:
Year-end is an excellent time to consult with a tax professional or accountant. They can help you strategize and ensure you’re taking full advantage of available deductions, credits, and incentives. A professional’s guidance can save you money in the long run and help you avoid common tax pitfalls. Q4 is what tax professional call tax planning season.
Preparing for year-end reporting and tax season is a vital responsibility for every business owner. By following these steps and maintaining good financial records throughout the year, you can streamline the process, minimize stress, and potentially reduce your tax liability. Remember, proper organization and staying informed are key to a successful year-end transition, setting the stage for a prosperous year ahead.