Tax Season in July?
The painless approach to business taxes
With Q2 behind us and half of summer still to go, annual business taxes are probably the last thing on your mind! But I’d argue that a little bit of relaxed preparation now is worth the stressful days you could yourself save after year-end. Here are the three most common questions that tax accountants may ask their business clients at tax time. And here’s how to get the answers ready now!
1. “What is ___________ account?”
Can you skim down your chart of accounts and give a quick description of the contents in each account that has a balance? Try it out to see how well you know your own books! Tax accountants will most frequently ask about the contents of industry-specific accounts (ones that they don’t see everyday) and tax-relevant accounts (ones that usually result in a book-to-tax difference, like Meals or Penalties). Familiarity with the contents of these accounts can save you time while coordinating with your accountant at the end of the year and while categorizing daily bookkeeping transactions throughout the year.
Check out this article to see how to set up a clean and thorough chart of accounts.
2. “Can you send me the last reconciliation report for this bank account?”
Can you instantly pull up the reconciliation reports for all of your active business bank and credit card accounts? Tax accountants most often request only the final month’s reconciliation statements (December for calendar-year businesses). But reconciliations build on each other throughout the year. So, the December reports rely on all the months before. Preparing your year-to-date monthly reconciliations now is a super-effective way to save yourself some grief at year-end.
Okay, but what are bank reconciliations? Bank reconciliations are a system of confirmations that ensure that 1) all of the activity in a certain account are being included in the books, and 2) that all of the activity in the books attributed to a certain bank or credit card account actually occurred according to the bank and are also not being double counted. If you link your bank accounts to your bookkeeping software, these types of reconciliations are doubly important to ensure completeness and detect any potential glitches during the data transfer from banks to books.
3. “Are there any additional business expenses that weren’t included in your books?”
Can you confidently say that all of the business expenses that you would like your tax accountant to know about are already included in your books? Tax accountants ask this question in case any business expenses were accidentally paid for with a personal card or, less often, if there were any personal expenses that could be partially attributed to the business (like a portion of property taxes for a home that is partially used to conduct business.) This question could be the most important to answer mid-year, because there’s still time to clean up this bookkeeping practice for the upcoming months! The two fastest steps to correct this practice mid-year are 1) make a habit of using only business bank accounts and credit cards for all business expenses and 2) identify any business expenses that have been paid for with a personal card and add (or ask your bookkeeper to add) them to the business’ books as expenses.
TL;DR
Getting ahead on tax season in July might feel early, but it’s a smart move. By reviewing your chart of accounts, keeping reconciliations up to date, and making sure all business expenses are recorded, you’ll save time and stress at year-end. These small steps taken now can prevent major stress later and may even uncover opportunities to improve your financial processes along the way. Your future self (and your accountant) will thank you.
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Not familiar with bank recs or tracking expenses? If there’s a bookkeeping concept you'd like to hear more about, drop a comment or message with a topic you'd like to see covered.
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