The size of your business and the complexity of its finances often dictate how arduous tax season will be when it comes time to gather the necessary records. You may need a few weeks, or you may need to start thinking about tax season starting in Q4. Everyone, however, can benefit from early business tax preparation for two reasons: 1) to make filing taxes easier and more efficient and 2) to use those organized records to analyze your company’s financial health and begin thinking strategically about the future. Think:

    • Budget preparation
    • Accurate forecasting
    • Identifying trends
    • Tracking funds owed to you or from you
    • Showcasing your financial stability

The ultimate use of your financial records is that they provide you with the information you need to make critical decisions—tax or otherwise. There is no room for inaccuracies, incompleteness or miscommunication where your financial records are concerned.

Below are 18 checkpoints to approach now to prepare well in advance of tax time and to maintain pristine records year-round.

Relationship Building

How you engage with people throughout the year impacts your ability to obtain information, work efficiently on projects and resolve issues.

  1. Consistent and open internal communication – Engage with other department heads and ask how you can help them. Give short expense report orientations to new hires. Teach them how to code invoices. These are win-win situations for the tasks they address and the relationships they build.
  2. Consistent and open external communication – Be proactive. Don’t wait for a crisis (or tax time) to reach out with questions for tax experts, legal experts and other knowledgeable colleagues in your organization. Stay on their radar to ensure that you are top-of-mind when you need quick assistance.

Documentation and Processes

If your business shifted to remote work or made other profound adjustments, it’s time to realign your documentation and capture the details of new workflows. Identify opportunities to simplify tasks and streamline procedures as you move through this checklist.

  1. Update your SOPs – Keep your standard operating procedures (SOPs) current. Checklists, schedules and training manuals are the backbone of a smooth-running accounting department. Conduct routine reviews and make prompt updates. Review SOPs when processes change to keep expectations clear.
  2. Review your month-end timeline – Is there an opportunity to shave off a day? If your reconciliations, subledger review and documentation are all completed in a timely fashion, month-end close will flow without surprises.

The Devil is in the Details

Inaccurate, missing or misclassified data can render reports useless to your tax preparer and your team.

  1. Capture and classify all financial data – Make sure your accounting systems or manual processes identify and record all data from all of your source systems (e.g., banks, subsidiary ledgers and pass-through accounts like PayPal).
  2. Review catch-all accounts – Transactions coded to ‘miscellaneous’ accounts should be rare. Add accounts when segregating activity to make reviews and decisions easier.

Financial Report Review

Your financial statements are the big-ticket items when it comes to tax time—and truthfully, anytime. Accuracy is essential for effective business tax preparation and beyond.

  1. Balance sheet – Your assets, liabilities and owner’s equity are recorded here. Comparing your investments and debts to prior quarters can quickly alert you to discrepancies and trends.
  2. Profit and loss statement (P&L) – Also referred to as an income statement, this high-level view of your income and expenses will show you where you need to drill down and investigate further.
  3. Cash flow statement – Seeing your liquidity, solvency and investment mix will help you determine when to rebalance your investment portfolio or secure a loan for expansion.

Account Review and Reconciliation

Each asset and liability account needs supporting tables or ledgers to match its balance in the general ledger (GL). Perform monthly reconciliations to tie source documents to the GL, especially when the values come from external systems, such as banks or payroll processors.

  1. Accounts receivable (AR) – Staying on top of your receivables is essential to keep your business operating. Make sure your bills are going out on time and only valid accounts are on your books. Watch the aging and take quick action on delinquent accounts, writing them off when necessary.
  2. Accounts payable (AP) – All invoices need to be recorded as promptly as possible, otherwise you will miss early payment discounts. Conversely, if maximizing cash flow is your goal, consider setting your systems to pay on due dates.
  3. Payroll (PR) – Whether you process your own payroll or outsource it, your payroll reconciliation (and accruals, if you record them) must be routinely reviewed for reasonableness. When you spot check names, make sure former employees no longer have system access.
  4. Bank and investment accounts – Accounting software wizardry does not exempt you from the responsibility of visually ensuring that bank statements exactly match your numbers. Reduce your risk of fraud and errors by being meticulous in your bank reconciliations.

 AP Contractor and Payroll Record Review

  1. Internal W-9 audit – Each independent contractor (IC) needs a form on file with their tax identification number (TIN) with all fields matched to your system. Spot check high-dollar payments and those made for legal services. All ICs paid over $600 or for legal fees will need 1099-NECs produced at year end. You need to withhold 24% of each payment made to individuals or companies who have not provided their TIN, then remit the funds to the IRS.

Use the IRS TIN matching database to clean up your records and reduce your chance of penalties. At risk is $50 per 1099-NEC that is missing, late or incorrect as well as potentially being flagged for an IRS audit.

  1. Internal payroll 941 quarterly return audit – Review your 941s and their payments with your payroll subledger. If COVID-19 or other tax credits were taken, documentation should be reviewed and completely supported. Penalties for inaccurate or unfiled W-2 forms can be $50-$270 per W-2.

Assets and Agreements

  1. Contract review – Check all new agreements, contracts and loans that occurred during the year, as well as existing ones, to make sure you are meeting your obligations and recording contracts properly. Make sure all lease agreements are documented as required by the new lease accounting standard, ASC 842.
  2. Fixed asset review – Conduct spot checks and periodical, thorough assessment of all fixed assets on your schedule. With remote work still prevalent, make sure to include company-owned materials and computer hardware that are housed off-site.
  3. Inventory review – If you are not performing routine inventory checks of your raw materials and salable products, plan them now. If you are doing them routinely, switch up your schedule and perform checks at different intervals.

Proactive Business Tax Preparation Can Foster Healthy, Ongoing Accounting Practices

Ongoing inspection of your accounting and financial records, and the processes that result in them, will shore up your foundation and set you up to confidently enter tax season.

If your organization needs a hand in executing these 18 steps, contact Paro today to be matched with fractional experts who can help your team with timely, accurate financial reporting for tax season and beyond so you can focus on your high-level business needs.