Preparing Your Books for Tax Time

There are three reasons you want to get your books ready as soon as possible to hand over to your accountant. First, preparing your books is a distraction from managing your core business. Second, if you beat the information rush to your tax accountant, he or she will be more readily available to advise you on options available to minimize your tax liability. Third, a big weight is lifted from your shoulders and the world is once again a good place.

Steps to Prepare Information for Your Tax Accountant

The first step is to make sure cash is reconciled to your bank statements through the end of December. This will give you a solid starting point, especially if your are on a cash basis for tax reporting, to ensure your financial information is accurate and up to date. I’m not saying your checks and deposits need to have cleared the bank to be included in 2009. I am saying that a bank reconciliation will ensure that you didn’t miss any transactions and that a review of bank statements will be a part of any Internal Revenue Service audit.

Perform a “reasonableness test” on your income statement and balance. If something doesn’t make sense to you, investigate it or have someone else provide a good explanation or a correcting entry to the books. One error I commonly see is a monthly recurring item being unrecorded in December and recorded twice in January. A good way to check for this error is by reviewing a month-to-month income statement, which allows you to see changes in each expense category.

Run a balance sheet for the last day of the year and compare this against the balance sheet you provided to your tax accountant for your tax return. If any account balances have changed from amounts entered on your prior year return, someone is going to have to identify what has changed. It will cost you if you leave this task to your tax accountant. One of the most common issues is the voiding of a prior-year check. Identify discrepancies and bring them to the attention of your tax preparer.

Steps for Easier 2010 Income Tax Reporting

Let’s talk about what you can do to make tax preparation for 2010 less expensive with the following caution. Financial reporting serves three audiences: investors and lenders, regulatory and taxing authorities, and managers of the business. Your objective is to minimize the time, effort, and cost to prepare appropriate and accurate reports. I recommend you consult an accounting professional to develop a strategy to ensure this objective is met.

If your tax accountant makes corrections or adjustments to your financial statements in preparing your tax return, find out which corrections or adjustments should be recorded in your accounting records and as of what date. I recently discussed this with a client who had made adjustments for the 2007 tax books in the first quarter of 2008. As a result, these adjustments had to be identified and reposted to 2007, creating costly reconciliation work in preparing the 2008 tax return.

Tax Planning

Be proactive in controlling your tax liabilities. Discuss future tax strategies with your tax advisor. A little advance advice on structuring future transactions can result in big tax savings.