Getting Ready for Tax Preparation

As a small business owner, having an approach for minimizing taxes is as important as your operating strategy. The more disciplined you are in getting ready for tax preparation, the greater the probability between receiving a refund or having a tax liability.

There are several reasons why you want to get your books ready and handed over to your accountants for tax preparation as early as possible. The first is the fact that the work involved in preparing the books for tax preparation is a distraction from the everyday management of the business. Another is that tax preparation resources, that expect a rush at tax time, are more likely to give your better service if you can get your tax information to them early. Finally, since the work of preparing your books for tax preparation is quite demanding, getting it done early will reduce your workload and stress level.

Tax Preparation Steps
The first step in tax preparation is to reconcile all of your business bank statements through the end of December. Since the review of bank statements is part of any IRS audit, you want to make sure that you don’t miss any transactions that are relevant for the tax year. Having your bank statements reconciled and having your financial information up to date will give you an appropriate starting point, especially if you use the cash basis of accounting for tax purposes.

Before sending your information to your tax preparer it is important to perform some type of gut check or reasonableness test on your income statement.  If you see something that doesn’t look right there is a good chance that it isn’t.  Make sure to investigate all items that do not meet these tests and ensure that there is a good explanation for each of them.  A common error is to have the same items reported in December and in January.  One method to analyze the books and find errors is to review income statements and other financials on a month to month basis, where inconsistencies are more easily identified.

Finally, run a balance sheet for the last day of the year and compare this against the balance sheet you provided to your tax accountant for your tax return. If any account balances have changed from amounts entered on your prior year return, make sure to identify what has changed.  Doing this yourself will save you money since your accountant will charge you to do it as part of your tax preparation.  To minimize tax issues, try to identify discrepancies and bring them to the attention of your tax preparer.

Steps for Making Tax Preparation Easier
In getting ready for tax preparation, your goal should be to minimize the time, effort, and cost of preparing an appropriate and accurate return.  Since tax returns are used by investors, lenders, regulators, and tax authorities to better understand your business, it is important to ensure that there are no glaring mistakes that can cause future problems or impact your ability to operate or raise capital.  Due to the impact that your returns can have on your business, it is recommended that business owners employ the services of tax consultant that can work with your accountant to determine an overall tax strategy for the business.

Another way to reduce the cost of tax preparation is to make sure that any changes made to your financial statements that are made in preparing your tax returns are reflected in your accounting record.  Doing this will not only reconcile your books to the tax returns but will also reduce the time that your accountant will have to spend reconciling your books to prepare the next year’s taxes.  Adjustments not made in the correct accounting period will have to be identified and reposted to previous periods, creating costly reconciliation work in preparing the subsequent year’s tax return.

Tax Planning
Since tax returns have an influence on a company’s ability to raise capital and its business credibility, it is important that business owners are proactive in controlling their tax liabilities and their tax returns.  Taking the time to develop a tax strategy that is congruent with your financing and operating strategies can result in tax savings, while providing a consistent message to the marketplace.  Owners should make tax planning a high priority and ensure that it supports the firm’s overall business goals.