There are basically 3 buckets that you have to give some concentrated focus to come tax prep time for your business.
Money coming in – otherwise known as revenue
Money going out to support the business – otherwise known as expenses
And a sub category of expenses of money that pays for employees – we call them, labor costs
Each of these buckets have special tax needs, and you’ll have to treat them all slightly differently.
Now, before we even get to the buckets, let’s talk about the pre-prep. That’s right, pre prep should have been going on all year. You should have a bookkeeper, or at the very least bookkeeping software, that is being diligently kept up to date month by month. All money coming in or going out should be logged and classified. And at the end of each month, you should be balancing your bank statement. Not just to know that you know how much money you have in the bank – but also because, if you let those statements go by month after month, and something has happened, you made a mistake or the bank did – well, that can come back to bit you really hard later on. So it’s absolutely the best practice to balance those statements every month.
Now, I’m not even going to address things like making sure you have the right forms, and you know the filing deadlines etc.
Why not? Well, because while I know that, of course you can handle things any way you choose, but my STRONG advice is – do not try to do your business taxes yourself. Get an accountant that knows what they’re doing.
Business taxes can be really complicated, and there can be hidden credits or deductions that only a professional is on top of. Also, for many small businesses we have a corporate structure that makes taxes even more complicated. For instance, an S-corp that has pass thru tax treatment.
So, no matter if you have a bookkeeper, or you are your bookkeeper, DO NOT skimp on getting an accountant. Trust me, you really need one, and they are worth every penny you pay them.
OK, it’s time. Gather your records and receipts and – on to the buckets.
Let’s start with money coming in (I love that part). These are mainly client payments to your company. Oh, there may be a one off credit here or there for something you purchased – but the vast majority of this bucket is money your clients paid to you. Or, in some cases, didn’t pay to you.
You see, you have to not only track the money you received, but also the money you charged but that was never paid. Or it was paid late, so you had to charge an additional finance charge. The finance charge situation is easy, you just have to make sure you account for that additional charge. But what to do about invoices that didn’t get paid at all – that’s more complicated. Will they be a write off, meaning you have your accountant write the amount off as a loss on your books
Sound’s like a plan, right. Well, not so fast – there are some important questions that can determine if you can write off an invoice. Things like, was the invoice recorded on your business books, was that income reported on your tax return, is your accounting on an accrual or cash basis. And if you have no idea what the difference is between accrual and cash basis – that’s why you need an accountant. I know it’s one of a hundred reasons I need an accountant!
So, you need to have a talk with – yes – your accountant about unpaid invoices. And see what remedies are available to you.
Looking at the money coming in bucket, also gives you a great opportunity to review your sales for the past year. Are they up, or down. Which products or services sold well, and which sold poorly. If your clients are retained or recurring, did they increase the service level (meaning, did you upsell to them). How many new clients came on board, and alternately, how many left. Are those numbers more or less than they were last year.
You see, looking at the money coming in bucket gives you a valuable partial snapshot of how the business is doing. I say partial because how much you make is only part of the puzzle, the other critical part is how much you keep.
… there are some important questions that can determine if you can write off an invoice. Things like, was the invoice recorded on your business books, was that income reported on your tax return, is your accounting on an accrual or cash basis.
And that brings us to the Money going out to support the business bucket – also known as business expenses.
Now, this is where your chart of accounts comes in handy. A chart of accounts is a list of all the categories you use for income and expenses in your business. For instance, office supplies, rent, technology hardware, utilities – these are all examples of expense categories you’ll see on a chart of accounts.
Putting every financial transaction in the right place on your chart of accounts, ensures that things are properly classified on your taxes. Some categories can be deducted and some can’t – a clean chart of accounts helps your accountant easily see which is which.
Money going out includes things like payments for tangible goods such as technology and office supplies; and payments for service related costs like contractors and consultants – think attorney fees, accounting fees, marketing fees and well – you get the idea.
Here’s a pro tip – most banks will let you define how you want payments to be categorized, and they will give you a report of how much money you spent in any given category. Something like, $20,000 on entertainment, and $100,000 on rent and utilities.
Now while that may not cover ever item you pay during the year, it does come in handy when you’re getting organized for tax time.
Don’t waste another minute trying to figure out how to get your business going and what should come next.
Grab your Free 3-Step Leader’s Journey Business Builder course, and get freedom and peace of mind, knowing you are on the right, proven track.
And finally, there’s the sub business expense category of Money that pays for employees bucket. This includes things like salary, payroll taxes, bonuses, the cost of benefits etc.
By the way, there’s an argument for including other overhead expenses like parking, office supplies and other work related materials – but for clarity, I just leave those items in the Money going out to support the business bucket.
Now again, tax prep becomes so much easier when you are working with a good accountant. Generally they will send you a checklist at the beginning of the season – it will help you make sure to gather all the necessary documents and information they need to complete your taxes.
You get them what they need, they do a preliminary tax filing, the two of you discuss any important issues, they file, you pay – and viola…you’re done!
Sure, I know I slipped the ‘you pay’ part in there like it was really casual – but what the heck. Most years you are going to have to pay, either all at once, or quarterly with estimated tax payments. So, that’s a bitter pill we all have to learn to swallow.
So, start early (now actually), grab all your info, and ‘get thee to your accountant’. And use this time and all this great data to do a focused review of where your business has been, how you grew last year, and what your plans are for the future.
Tax prep isn’t all bad. After all, it’s information – and information is power.