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Bookkeeping experts share how small business owners can prepare their books for tax season

Tax season can be an especially stressful time for small business owners; there are many documents to gather and organize. But if you’re procrastinating on tax season prep, it might be time to rethink your strategy. Preparing your books for tax season sooner rather than later relieves tax-related stress and reveals opportunities for the year ahead.

We met with two bookkeeping experts, Jennifer and Alejandro, to learn how small business owners can get their books ready for tax season, avoid common mistakes, and maximize refunds. Here’s what they had to say.

Meet the experts

Jennifer is a QuickBooks Live bookkeeper. She has been a CPA for 27 years. In her private practice she has offered tax preparation and bookkeeping services for nearly 20 years. She primarily works with service-based businesses.

Alejandro is a QuickBooks Live bookkeeper. He holds degrees in accounting and information systems and has been a bookkeeper for more than 30 years. He primarily works with transportation and construction companies, restaurants, and retail businesses.

What documents do bookkeepers need to help business owners prepare for tax season?

Jennifer: “We’re going to need the last tax return that was filed with the IRS. We’re going to take that and we’re going to make sure that QuickBooks reconciles so we have a good foundation to start with. Then we’re going to ask for other source documents. We’re going to need all of their statements. We’re going to need bank statements for every bank account associated with the business for every month of 2020. We’re going to need all their business credit card statements, and we’re going to need any loan accounts that they have so we can balance those as well. Sometimes a business will have charged a few things during the year on a personal credit card. Well, we also need a list of those items so we can add [them] to QuickBooks. They are legitimate business expenses that we want them to be able to deduct on their tax returns.”

What’s the first thing a bookkeeper will do to prepare a client for tax season?

Jennifer: “Generally, just learn the flow of their business and their accounts. We set up the chart of accounts for them so it’s going to be easy for their tax preparer once we turn everything over. My goal is for that tax preparer to have to spend as [little time] as possible on that tax return. It’s so clean and ready that it’s not going to cost the client as much money. They’re not going to have to spend a lot of time and spend a lot more money on their tax return because their books are already so clean.

“One thing I also like to do is scan through their financials and see if anything looks like it’s out of place. It could be something less subtle than just a balance being negative that you would expect to be positive. Do they have $30K in meals and entertainment? I would probably take a look at that because we want to make sure that something didn’t get mislabeled and put in the wrong place.

“I always look for personal expenses. We need to make sure that anything personal that they paid for out of their business account or with their business credit card is recorded as an owner draw, not an expense, because that’s not something that’s going to be deductible on their tax return.”

Alejandro: “The most important thing in cleanup is always the balance sheet. Balance sheet items are the ones that, most of the time, they haven’t added. There are always things that are not classified correctly, or maybe they never booked it previously. Because everything that’s in the profit and loss can be reclassified or just needs to be entered. So it’s much easier to clean [up] a profit and loss than a balance sheet.”

What are the steps you take to prepare a client’s books?

Jennifer: “The first thing we do is reconcile to source documents and reference their tax return. Then we make sure all of their accounts, all their transactions, are categorized. Then we would reconcile all the accounts. Organizing their chart of accounts is something that we would also do in that cleanup of the books.”

Alejandro: “So the first thing we do is get a copy of their tax return. The tax return and source documents are fundamental because they give us the beginning balances. The next thing we process is the trial balance [for] the most current financial data they have; that allows us to see how the books are. If there’s anything out of balance or something doesn’t look right, we review it. We also check if the beginning balances match. We have something to target from there.

“From there, we start asking for your documentation. And we start asking questions. Have they reconciled the accounts? Have they balanced out any loans? Have they purchased anything that they haven’t reported? There are always questions that we need to ask before we start asking for documents because something will always come up.”

When should small business owners start preparing for tax season?

Alejandro: “It’s more efficient for you and your bookkeeper to start sooner [rather] than later. You’ll have more time to gather your documents and work through the prudent questions. When your bookkeeper is rushed, they’re just going to get something done. They’re on a timeline. So as a bookkeeper, they’re focusing more on the timeline than the process. Maybe they’ll skip certain things because they need to focus on the most important things, like the bank statements… the things they need to get the books started. So down the line, we might start seeing things, like maybe the client has a loan. Well, now we need to go back and tell them, ‘Hey, I saw this.’ But if the client starts earlier, the whole process will be more relaxed. We’ll have time to ask more prudent questions.

“There are benefits for the business owner as well. If they can know earlier what their financial situation is, they might know in the new year if they can hire people or if they can make a big purchase. Doing your books early allows for the most important thing: tax planning. How are the books looking? Do you need to start making estimated payments? You can look at your business and say, ‘Hey, I can take advantage of this tax because I know I’m going to pay X amount in tax. I can now say I’m going to hire more employees. I have the ability to buy these new assets to help me reduce my tax.’”

What are some common bookkeeping mistakes business owners make?

Jennifer: “Sometimes small businesses connect all their bank accounts to QuickBooks, including personal accounts. That’s something that we always look for. If it’s a personal account, let’s disconnect. This doesn’t need to be connected to QuickBooks. You don’t want to mix personal and business banking—they’re oil and water. We watch for personal transactions that come through the business account. We try to discourage that, but it still happens sometimes. We try to guide clients through which expenses are business expenses and which should be categorized as personal.”

Alejandro: “The common mistake that I always see is, again, in the balance sheet. They’re not reporting their loans. They’re not reporting their assets. This is very common with companies that own other companies, or they have the same owners and different companies, and what we call intercompany loans. Those are always huge mistakes. Those are [situations in which] each company borrows money. And to keep tabs on that, it’s just wild.”

What tips do you have for small businesses to help them keep their books clean?

Jennifer: “One tip is to always record the payee on transactions. A lot of times, from their bank feed in QuickBooks, clients just see the charge come through, let’s say from Target. They know exactly what that’s for, so they just put in the account and click add. Well, they didn’t ever add a payee name. Later down the road they’ll try to search [for] ‘Target’ in QuickBooks. Well, if they never put in a payee name, then that expense is not tied to Target at all. It’s really important to put in those payee names. Not just for their tax return, but so they can track expenses and look them up later. Or even to run reports by a vendor. Without a payee name, you wouldn’t be able to do that. It would just show nothing on there if you never added a vendor name. Same thing with customers.”

Alejandro: “It really goes into the balance sheet. That’s what you want to focus on. If you start seeing negative items in assets, or if you start seeing positive things in liabilities, something’s not posted, something wasn’t reported. The balance sheet is the heart and soul. Lots of times business owners will just concentrate on posting expenses and getting their vendors’ names into an expense and just go with it. But it’s hard to clean the balance sheet after the fact.”

What advice do you have for business owners just starting out?

Jennifer: “One thing I think might speak to new business owners as well as Excel users… It’s so important to record every transaction as soon as it happens. I always emphasize that by connecting their bank feed in QuickBooks Online, they aren’t going to miss any expenses or income. It’s going to capture everything for them because it’s automatically connected to their bank or their credit card. Whereas Excel, if you forget to enter a receipt, or maybe the receipt thing didn’t work that day and it didn’t get printed, or maybe you’re not checking your bank statement, then you’re going to miss that recorded transaction.

“I think it’s just really important to know that because, for new business owners, their focus is running their business. I have a few that like doing numbers, but most of them literally just don’t want to deal with the numbers. Really their focus should be what their gift is, and their gift is running their business. We can cover them on the back end and make sure all the numbers are in the right place. But it really takes the stress off when you’re using QuickBooks Online. You don’t have to worry about losing your receipt or anything [like] that, it’s all going to be there.”

Alejandro: “To me, the main thing for any small proprietor is to keep good records. Because most of them don’t keep good records. Especially if they spend cash… because they like to pull money out of the ATMs. This is very common. They buy a lot of things in cash. And if they don’t have receipts, then you can’t help them with all that money they pulled out. It’s so important to keep everything, no matter how small or how expensive. It’s the records. Can’t get any more basic than that to help them out.”

What are some disadvantages of using Excel for bookkeeping?

Jennifer: “Aside from missing transactions and other data entry issues… it’s going to be more difficult compiling the information you need to generate 1099s at the end of the year, whereas with QuickBooks Online you can literally store everything you need. It makes it a painless process at the end of the year. That’s a biggie because for many business owners, things get pretty chaotic at the end of the year, and then you’ve got to send out 1099s and you’ve got a lot of people waiting until the last minute to get addresses, tax ID numbers, and other information you need.

“Whether you use QuickBooks or Excel, your tax preparer still needs the same documents to prepare your taxes. They still need the same source documents, the prior year tax return, all the statements. They basically need all the same stuff; you just have to gather it manually.”

What are some advantages of working with a QuickBooks Live bookkeeper?

Jennifer: “It’s always a good idea to have an expert review your books. I had one client that will be amending her return for last year because I figured out she wasn’t using a good workflow and she actually duplicated about $80K in income. She owed this huge amount to the IRS last year, but it was because her financials weren’t right. We’re still waiting for her to get that amended. But I think that’s one really good way we can help them with their workflow. We can make sure they’re doing the steps in the right order and not missing something or doing something the wrong way. I’ve had at least three clients make the choice to amend their return based on information that we were able to find, and just realizing that things hadn’t been recorded quite right. They check with their tax advisor and decide it’s definitely something worth amending the return for.”

Alejandro: “We’re just trying to make more small business owners aware of what’s out there. How can we help them? We try to ask good questions that lead us to good documents. That way we can fix their books accordingly, and reclassify them, and help them out—get them to the point where they can plan for taxes or they can plan for [a] stimulus. Working with a certified bookkeeper gives them a sense of strength for their business, for anything.”

How can small business owners streamline tax preparation?

Jennifer: “If I’m preparing taxes for somebody in my practice and they show up with a box full of receipts, I will go through those for them… but it’s going to cost them a lot more. If they show up with QuickBooks, they can invite their tax advisor to be an accountant user on their QuickBooks Online, and they can literally download everything or look up anything that they would need to look up. As far as time, that’s going to save them a lot more money.”

Alejandro: “We always tell all clients to keep records. You need to have records of everything that you purchase, all receipts. It doesn’t matter how small the receipt or how big the receipt is. So having records of all the receipts of your purchases really helps out to keep your books straight. Because we don’t want to make assumptions just because the system reads it, because it’s artificial intelligence. It’s thinking, ‘Oh, okay, I think I’ve seen this, and I believe it’s here.’ So that’s why it’s really important to always keep records of all transactions. That’s the number one thing. No matter how small it is, you should keep a record of it because the IRS could want to see that receipt.”

What are some tips for business owners operating in a post-pandemic world?

Jennifer: “The pandemic has changed a lot of people’s businesses. Some of them have been forced completely online. The first thing that popped into my head is that in QuickBooks you also have the advantage of being able to connect to a merchant account so people can pay online. You just send them an electronic invoice, there doesn’t have to be any person to person contact, and there are options. They can pay with their bank account or they can pay with a credit card. That could really help with getting your money on time and not having to meet face to face with customers to help with your exposure. There are obviously lots of different merchant services that you can use. But in my research QuickBooks Payments has some of the lowest rates out there.

“I have one client with QuickBooks Live and they have a food product that they used to sell at farmer’s markets. That’s mainly what they did, they went around to farmer’s markets. Well, those are all closed. They’ve had to really push their website. Now most of their stuff is online and it has completely changed the look of what they do. They’re using QuickBooks Payments with the merchant account and using some other online sources to sell their products.”

Alejandro: “Some clients were obviously forced to shut down for a time, and some permanently. They feel that because their business didn’t work, they no longer have to worry about receipts. They start eluding themselves away from any type of bookkeeping. They feel like their business is not ongoing, so they’re in survival mode. COVID-19 has caused a lot of businesses not to communicate with their bookkeeper. They kind of shelter themselves. They’re home, and they don’t know what to do, and they feel like there’s no communication needed until they start up again. My main thing is, no matter what, open up your communications with the bookkeeper. It’s always important to talk to them, no matter how small [the issue].”

Prepare your books for tax season

Get help preparing your books for tax season right away. The sooner you start, the better. Our certified virtual bookkeepers can help ensure your books are organized and ready for tax time.

Learn more about prepping for tax season with a certified bookkeeper in QuickBooks.

If you want to do your books on your own, using QuickBooks Online can help. Track income and expenses, run financial reports, and prepare for tax season with QuickBooks. 90% of customers agree that QuickBooks Online helps them run their business more easily.*

Learn more about how QuickBooks can help you prepare for tax season and beyond.

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