I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
Before Making Year-end Tax Decisions...
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The Achilles Heel π¦Ά of small business tax decision-making is good accounting. This time of year, we get on calls with our clients and talk about what the year looked like, how much tax they'll owe in the next 12 months, and what they need to do before the end of the year. Those are the right topics - but the business income can often be a big moving target. And if that number was bad when we did planning, it will make our tax estimates equally bad. Today, we're jamming on what you should do as a small business owner before turning over year-end books to your tax pro for end of year tax planning. β€΅οΈ Reconcile the Bank AccountsOkay it's basic - but make sure you've synced all bank (and credit card) transactions. π Then reconcile the bank account in QuickBooks or your accounting software. Cash and credit card transactions are the majority of tax activity for a lot of small businesses, so if you haven't gotten your books caught up in 5 months your projected income will be way off. And "Ask My Accountant" doesn't count. π ββοΈ That could be income, expense, or distributions. Tie to the Tax Return Last YearThose in the "biz" will call this "rolling equity." We want to make sure any adjustments that were posted to the books used to prepare the tax return are booked in QuickBooks (or whatever system). This gets us on the same starting page as last year's tax return. If you booked $100k of deductions into last year's books after you sent us the files to prepare the return that $100k needs to go somewhere. This process helps us figure that out before making any planning decisions. π Pull up last year's balance sheet in QuickBooks and tie it to the Schedule L on last year's tax return. Cash, AR, AP, ending Equity should all match. As well, the current month's ending balance sheet beginning equity accounts (retained earnings excluding current year income, capital contributions excluding current year activity, distributions excluding current year activity) should also equal last year's ending capital on Schedule L. Monthly Balance Sheet CheckRun a balance sheet report and set the columns by month. π Look for odd account movements - high balances for a previously low or non-existent account, low balances for a traditionally high balance account, weird account names you don't recognize. Dig into the accounts' months that look off or weird. Make sure any transactions are coded correctly. And yes, there's a reason we're doing balance sheet first. Corrections here flow to the P&L so it needs to be done in this order. Monthly P&L CheckNow do the same type of monthly report for your income statement. Here we're looking for lumpy months. π’ It makes sense here to do a trailing 12 months P&L to catch any of last year's Q4 hits we didn't expect. Write down what the lumpiness is driven by and make sure they don't signal more lumpiness coming this Q4. Or if so, that we can factor that into the year-end estimate of income. Related Party Due To / FromsWhen you have multiple entities, it often happens where one entity will record income to another and that other entity will miss that entry on their side. The result is you have too much income recorded and are missing the offsetting expense. π«’ Pull up the current month end balance sheets for all entities and identify the related party or intercompany due to / from accounts. Plot them all out on a spreadsheet. They should all net out to $0. π€ If not, you have some missing activity to record or classify correctly. The more intercompany activity you have, the higher the chance this happens. And you definitely need to be sure all income and expense are tied down before pulling any P&Ls for tax planning. The TakeawayThere is still plenty of time left in the year to move the tax needle - but you can't start with bad information. This is a good starter checklist that you should run on your financials before sharing them with your tax pro. Or if you're expecting your tax pro to do this as a part of the tax-only engagement, you should expect a bigger bill. π° If you need a professional to help you run this process - we can help. πββοΈ And we don't even need to be your tax preparer. Our accountants can help run a year-end diagnostic for you to get you better tax planning from your own tax pro. Check out "Work with our CPA firm" link π below and let us know you'd like an accounting diagnostic. π«‘ Group Chat Worthy Posts π₯π²
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I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
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