January through April can feel like an all-out scramble to collect and track down information for your CPA. But it doesn’t have to be. You can start chipping away at your to-do list now to make the new year a time for tackling new goals instead of tax panic. Prepare for tax season now by getting these things in order before the end of the year.
The biggest task you’ll be facing to prepare for tax season is making sure your books are up to date. It can be much too easy to let things slide during the year and your books may reflect that. Start by reviewing all your transactions and reconciling them. Record any additional transactions you may be missing in your books as well (like anything purchased or sold in cash). From there take a look at your accounts receivable and accounts payable. Do you have any outstanding bills to pay? What’s the status of your invoices? Are your clients current? Now is the time to track down late-paying clients before the end of the year.
When you want to prepare for tax season, you’ll need to know how to run reports for your accountant. Your CPA may request the following reports after the end of the year:
As you learn more about accounting and bookkeeping for your business, you can also use these reports to understand the financial health of your business. You can spot trends and spending patterns that affect your overall profitability.
Additionally, you’ll want to have a list of your business tax deductions listed with the necessary records (receipts). Business-related expenses can include:
If you are unsure if something is a tax-deductible expense, record it and ask your accountant to review it. You can give your CPA this information in a spreadsheet or something similar. Gather all your physical and digital receipts in an orderly manner well.
While you prepare for tax season, it may be a great time to evaluate if your business is best served by using cash basis or accrual accounting. Cash basis accounting is very straightforward for very small businesses or single-person entities, but accrual accounting can give you a clearer picture of your business’ performance month-by-month. Talk to your CPA about what system is best for you. Learn more about cash basis vs. accrual accounting here.
If you are a freelancer or independent contractor, you’ll expect to receive 1099s tax forms from any client that paid you >$600 in the last year. Once your bookkeeping is up-to-date you should be able to see which clients should send you a 1099. Some clients may need a reminder, especially if the work was done early in the year. After the first of the year, you could send out a thank you email for last year’s opportunity and a kind reminder to send a 1099 along at their earliest convenience. The last date for them to send them out is usually mid-February.
Don’t panic. Just because a client doesn’t send a 1099 does not mean you can’t properly file taxes. You will still report your income.
Whether it’s a home office upgrade or brick-and-mortar makeover, your home office expenses are tax deductible. This makes the end of the year a great time to knock out those long-awaited updates and repairs.
While you prepare for tax season, consider if your business is well-suited for incorporating. Your sole proprietorship may be ready to swap to an LLC, S-Corp, or C-Corp. You have until the end of the first quarter to decide which is best for you, but start looking at your options now. Your CPA can provide you with some counsel which is best for you. Incorporating can not only protect your personal assets, but provide you with better tax breaks, especially as your business continues to grow. If you are planning to hire help in the next year, you’ll want to incorporate your business. Depending on your industry, incorporating may also improve the legitimacy of your company to your potential clients and customers.
If you have been waiting to purchase a new computer or invest in more inventory, the end of the year could be a great time to do just that. Making business-related purchases can reduce your tax bill for the next year. You could also use this time to purchase annual subscriptions to your must-have software or coaching services.
Sometimes, despite all your hard work, you may come across situations where clients refuse to pay or ghost you when it comes time to collect payment. If you start preparing for tax season and you still have unpaid invoices, you may be able to write off the amount as a bad debt deduction.
Bad deductions are when you are unable to collect an invoice for goods or services that have already been given. While every effort should be made to collect unpaid invoices, you can write off bad debt as a tax deduction.
The debt needs to qualify as bad debt before you can write it off. You need a history of your attempts to collect on the invoice and the client’s response (or non-response). Then check out our guide for how to write a demand for payment letter. If you still find yourself in a circumstance where there is no possibility of collecting payment, talk to your CPA about writing off the amount as a bad debt deduction.
While preparing for tax season may not be your favorite task, it can help determine the future of your business. You can gain valuable insight on:
Use the information you’ve collected preparing for tax season as a reference point for next year’s goals. When used in tandem, your financial reports and big-picture goals can help you map out a successful plan for the upcoming year.
Tax season will always be easier when you are up-to-date on your bookkeeping. If you are struggling to stay current with your books, it may be time to hire help. You can outsource your bookkeeping to the bookkeeping pros at LessAccounting. They specialize in helping busy solopreneurs and small business owners succeed with streamlined bookkeeping that keeps business running smoothly.
Learn more about our bookkeeping services here.