As a business owner, you may know that once tax time approaches, it is less stressful if your bookkeeping is caught up. It is easy to let the books fall through the cracks, as doing them is a tedious process. However, once tax season comes around, having your bookkeeping up to date and ready will assist you in fulfilling the IRS requirements and helps you complete your return smoothly.
Some business owners prefer to deal with overdue bookkeeping on their own, but keep in mind we offer a Catch Up Bookkeeping Service.
Below is a step-by-step method you can utilize to assist in working through your backlog to bring your books up to date.
Step One: Collect all of your receipts
In order to start getting your books in order, you will need to gather all your receipts and invoices that are associated with your business expenses.
If you are unsure of what you need, here is a list of the various types of records to look for:
Invoices from customers
Look over your customer accounts and confirm that you have assembled all of the invoices from the specific tax year. You will have to take into consideration whether you use a cash basis accounting method or an accrual basis accounting method. The difference between these two methods is with the cash basis method, you only send your customer an invoice after they have paid. The accrual basis method tracks the purchase amount in your books as soon as the transaction occurs, even if the customer has not paid yet. For example, imagine you completed a sale in November 2015 for $500, but the customer did not pay until April 2016. With the cash basis approach, you would write the sale down in April when you received the cash, with accrual basis accounting, you would record the sale immediately in November.
Uncollected debt
Look for any customer accounts that have not paid their debts. If you are using the accrual basis accounting method, when a customer does not pay for the work you finished, you are able to write it off as a bad debt expense. The IRS requires proof that you sufficiently attempted to collect the debt and were unsuccessful before you can deduct the amount of bad debt from your return.
In most cases, when calculating the gross income of a business, the uncollected debts are deducted, either in part or completely. There are two methods used to claim bad debt – the specific charge off method and the non-accrual experience method.
The specific charge-off method involves deducting a particular debt that is partially uncollectable in the tax year. The nonaccrual experience method allows you to deduct the uncollectable debt right from the gross income of your business, so you can complete your tax return.
Expenses your business accrued
Gather your receipts for every purchase that your business made during that tax year. To be sure you are obtaining every deduction you can for your business, you can check out this broad list of small business tax deductions.
Accounts associated with vendors
Look at the accounts of all your vendors and confirm that you have paid all of them. You will need a copy of each bill from every vendor transaction. If are missing some of these bill copies, contact the vendor immediately and ask for one to be sent. Do not forget you will also need the bills for activities that are still ongoing in your business’s closing period, as these will need to be on your end of year financial statement.
Step two: Account Reconciliation
Reconciling your accounts is an especially important step. You will need to compare the account statements of your company versus the bank account records. These two statement balances should match, so you will need to check each transaction for accuracy. If you find an error, you will need to correct it, confirming your records are correct and the balances are equal.
If for any reason the balances on your accounts do not match, it can be a very costly process to have your accountant or bookkeeper deal with it. An accountant will change extra fees, as going through and fixing the errors will take time and be more work. To save yourself money, be sure to properly reconcile your accounts before sending them off to your accountant.
Step three: Business expenses should be separate from personal expenses
It is best to not mix personal and business expenses, as doing so leaves you vulnerable. When you use one account for both business and personal it leaves you open to personal liability for the debt and actions of your business. This is known as piercing the corporate veil.
The structuring of your company protects you from becoming personally liable for the losses your business ensues if you run a corporation or LLC. Piercing the corporate veil takes away this protection.
When tax season arrives, if your personal and business accounts are merged into one, it can be a big headache. Even doing the bookkeeping will be more difficult, as you will have to search through even more to find just your business transactions.
It is important to open a small business bank account and separate your business finances as soon as possible, if necessary.
If you are ever questioning if a purchase qualifies as a deduction for your business, the IRS has a list that distinguishes personal versus business expenses.
Step Four: Take advantage of paperless options
It will be so much easier to keep track of your records if they are in digital form. While you are catching-up on your bookkeeping, use this opportunity to go paperless.
These are some programs that you can use to help you digitize your documents:
- Shoeboxed – you can upload your receipts into this program. It will organize them, and an expense report will automatically be created.
- FileThis – this is an app for your smartphone. You take a picture of your documents, including receipts, bills, etc. and it stores them online.
- Evernote’s ScanSnap Scanner – You scan your document, and they are uploaded onto Evernote for storage.
Step Five: Gather your forms if your paid employees or contractors.
There are three types of forms you could need to file if you paid an employee and/or an independent contractor.
Independent Contractors
If you paid an independent contractor more than $600, you would need to file the W-9 and a 1099-MISC forms. A W-9 form is sent to the contractor to fill out their taxpayer data. Once the contractor completes this form, you will use the information to send a 1099 to the IRS. The 1099-MISC form is what the IRS uses to track payments to independent contractors.
Filling out these forms can be difficult, especially the first time. We recommend reading How (and When) to File a 1099 to assist you with the process.
Employees
If you paid an employee, it is mandated that you fill out a W-2 for each employee.
Step Six: Your expenses should be reviewed by a tax professional
Now you may be thinking this step seems unnecessary, especially if you prefer to do your bookkeeping and taxes yourself. While it may seem counterintuitive to hire someone, it is a big help come tax time.
A tax professional can look through your books for any errors and confirm you are claiming all the deductions you can for your company. They can also deal with the IRS on your behalf, even with an audit. It is sensible to have a financial professional you can go to before there is ever a situation where one is required.
After going over all these steps, if you decide it would be best for someone else to get your bookkeeping in order, our Catch Up Bookkeeping Service would be perfect for you.