Details Matter Bookkeeping


A Small Business Owner’s Guide to Prepping for Tax Season

by | Jan 5, 2024 | Bookkeeping Services, Business, Business Tips, Financial Services

Tax season can be a daunting time for small business owners; but, with the right preparation, it doesn’t have to be a headache. In this guide, we’ll walk you through essential steps to ensure a smooth and stress-free tax season.

The first step to a successful tax season is organization. Create a centralized system for all your financial records, including income statements, receipts, and expense reports. Digital platforms and cloud-based solutions like QuickBooks Online can streamline this process, making it easier to access and share information with your accountant.

In this guide we’ll assume you are using an accounting software, but an organized, digital filing system like Google Drive can also work if your business is very small.  Make sure you have a file for all of your receipts and important documents, and a spreadsheet to total all of your income and expenses.

Step 1:  The Dreaded Data Entry

This is the most time-consuming part of bookkeeping, but it’s absolutely critical to making sure that you are getting all the tax deductions you possibly can, and is the foundation for creating financial reports that let you monitor the health of your business and make better business decisions.  A cloud-based accounting software can link with your bank and credit card accounts and pull all of the individual transactions, so all you need to do is categorize them into the appropriate accounts.

Income and expense accounts can be subjective depending on your industry and the specifics that you want to track.  The key is to label everything clearly and be as consistent as possible when you are categorizing.

Step 2:  Reconciliation

Most businesses skip this step, but it’s so important to have this double check to make sure that everything you’ve entered is correct.  Reconciliation takes what you’ve put into the accounting software and matches it up to the actual bank/credit card statement.  It has its own module within your accounting software – all you need to do is enter the ending balance and the ending date of the statement.  In a perfect reconciliation, every transaction should be marked off and there should be a $0 difference.  If there are outstanding transactions, research why they haven’t cleared the bank and make corrections if needed.

Step 3:  Review your financial statements

Start with your Profit & Loss statement – this is the snapshot of all of your income and expenses.  Make sure you don’t have any accounts that are negative (that shouldn’t be).  Look for inconsistencies month to month.  Are there any accounts that are a lot larger than you think they should be?

Don’t forget to review your balance sheet!  The balance sheet is the record of all of your business’ assets, liabilities, and the equity you have in the business.  Check to make sure you’ve recorded the interest for any loans/liabilities you might have.  Loan interest is an expense that is tax-deductible!  Make a note of any new fixed assets you’ve put into service in the past year and tell your tax preparer about them.  Fixed assets are large purchases like equipment or vehicles that are typically over $2500 in value.

Step 4:  Collect documents for your tax professional

  1. If your tax preparer doesn’t already have access to your accounting software, you’ll want to send them your end of year Profit & Loss and Balance Sheet.  
  2. They don’t need to see every single one of your receipts, but you will want to send them any receipts for fixed assets.
  3. If you run a payroll, they will want to see your quarterly payroll returns and your W-2/W-3 documents.
  4. A list of any quarterly estimated tax payments you have made throughout the year.
  5. Any Form 1099s that you have filed for your independent contractors.

To avoid extra stress leading up to tax season, you should complete Steps 1-3 every month.  Again, an accounting software will make this super fast and simple, but it can also be done using spreadsheets – you will just have a lot more manual entry.  It also helps to have a folder in your filing system to add the documents in Step 4 as they happen throughout the year, so you’re not scrambling to find them at the last minute.

If you haven’t caught on to the theme yet, a good relationship with a qualified tax professional/CPA is essential.  While you can prepare taxes on your own, a good tax professional can help maximize your tax deductions, keep you in compliance, and help you plan for taxes effectively.  The expense is more than worth it – and it’s another tax deduction!  Meet with them regularly as your income changes, but especially towards the end of the year, so you can plan for taxes due.

P.S. If you’d like to receive a free handy-dandy bookkeeping checklist, you can grab one here!

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