Thursday, January 11, 2007
It’s almost income tax tame for Small Businesses. Don’t put off thinking about income taxes until the last minute. Let’s face it: preparing your income tax return is one of the most unpleasant responsibilities you ever have. Let’s make tax time easier. However, there are some things that you can do to make tax time easier:
- Review all components of your income and expense accounts
- Review and adjust your balance sheet accounts
- Make a file for all of your tax documents
- Print out your reports and create a backup of your company file
Review all of your income and expense accounts
Review the profit and loss report. Create a profit and loss for the previous year. You can begin with the income accounts; double-click each line item to view a detailed report for that account and review the detailed report for consistency. Make sure that the transaction types are proper for that account, that vendor or customer names are correct, that the amounts are appropriate. Generate a comparative profit and loss report for the previous and current year. Compare each income and expense account to the previous year. See if revenues increased or decreased and think if this makes sense for you. Compare each expense account to the previous period. There should be some consistency between periods. If you see expenses that were not there in the previous period you must understand if they should be there. With this process you may expose unrecorded or misclassified transactions. Review your cost of sales percentages if you sell products Calculate the cost of sales percentage for each cost of sales account to be sure that the percentages are logical. Verify that these numbers are correct, consistent with past periods, and make sense to you.
Review your balance sheet accounts
The balance sheet accounts are permanent accounts. They have a balance that carries over from year to year. Contrast these with incomes and expenses. Income and expense accounts are closed out at the end of each year and begin the every new year with a zero balance.
Bank accounts (Assets)
Always start review from the bank account. Reconcile it monthly; fix discrepancies between your books and your bank statement. Review the outstanding transactions for entries that shouldn’t be there. All un-cleared transactions in your bank account should be reviewed, but if you have old outstanding deposits on your bank reconciliation, they need to be addressed right away. Reconciling and adjusting your bank account on a monthly basis will make each consecutive month’s reconciliation much easier.
It is one of your most important assets if your business has inventory. Taking a physical inventory is the best way to ensure that your cost of sales is accurate. Most small business owners dislike taking inventory, but tax time is a good time to verify that you have an accurate inventory and that your cost of sales is correct.
Accounts receivable (Assets)
Accounts receivable are a critical asset. They represent money that has been earned, but not collected. Review your customer accounts monthly by producing an accounts receivable aging report and see amounts due from customers arranged in columns based on how old they are. Studies show that the older a receivable becomes, the less probability there is that it will be collected. Tax time is good time to write off those old accounts that are really bad debts. Review your accounts receivable monthly — or more often. Fixed assetsCreate a detailed report of changes in your fixed assets and make a depreciation schedule for the next year. Every time when make record of new asset purchases enter a detailed description of the asset in the memo field. Then, at tax time, create the report showing the changes in fixed assets. The resulting report will contain the date of purchase, vendor, a check or invoice number description of the fixed asset and the amount of the purchase.
Accounts payable (Liabilities)
Accounts payable to vendors should be reconciled to your vendors’ statements monthly. Keeping these current will ensure that you have accurate records at tax time, and have not missed any deductions.
Credit card accounts (Liabilities)
Your credit card account is an account that can easy get out of control. Reconciling this account monthly to your credit card statement will help to ensure that you have all of your tax deductions recorded. Enable on-line banking with your credit card accounts so that you can download all of your credit card transactions into your accounting software. This helps to have all details of each credit card transaction into your register and, because it has been downloaded from the credit card company, you know the information will match your statement.
Notes payable (Liabilities)
This is an area where small business owners often make mistakes. Don’t mix the entire loan payment with the interest expense account. Compare the balance per your general ledger to your bank’s balance. Payments on amortizing loans must be broken out into principal and interest. The principal is applied to the liability balance and the interest recorded as an expense. When your lender sends you a monthly breakdown of principle and interest, it’s only an estimate. The actual amounts applied to your loan balance will vary based on when the bank received and posted your payment to your account. Use the bank’s monthly estimate to record your payments, but request a loan history at year-end to adjust your accounts to agree to the bank’s records.
Sales tax and payroll taxes payable (Liabilities)
Review your sales tax and payroll tax liability accounts monthly making your tax payments. Verifying these accounts is necessary because you want to know that you’re paying the proper amount and it will ensure that your year-end liabilities are correct.
Create a file for all of your tax documents
At the beginning of the new year, you will receive plenty of tax forms, forms from your bank, brokerage house, vendors and state and federal governments. Label a file folder “Tax forms”. Include this file folder in the package you take to your tax accountant.
And remember: If you receive a tax notice about a delinquency or past due amount, send it to your accountant immediately!
Print out your reports and create a backup of your company file
Print out a balance sheet as of the end of the tax year and a profit and loss report for the entire year. While you are reviewing your accounts, make notes about what you’ve found and what doesn’t make sense for you. Then create a backup of your company file as of the current date. Your accountant can restore the backup file to view transactions and create detailed reports. In addition, you must prepare these additional reports:
- Copies of payroll tax returns
- All components of accounts receivable and accounts payable
- Accurate inventories
- Copies of sales tax returns
- A schedule of fixed assets additions
- Copies of notes payable
- All tax forms
When your accountant has made their adjusting entries, and you have entered those adjustments in your accounting system, create another backup.
Find the best Tax professional
This is very most important: Hire a competent tax professional and pay them well. Small business owners tried to be self reliant, independent individuals. They often attempt to prepare their own income tax return. However, when it comes to income taxes, you need to hire a competent tax professional. With the complexity of today’s tax code and constantly changing regulations and interpretations of that code, income taxes are just too complex for the small business owner. A good tax accountant can not only save you money on your income taxes, but help you reorganize your business and make it more profitable. Tax Accountant can assist with tax planning, retirement planning and estate taxes. But your responsibility is to give your accountant good information to work with.