In mid-January a lightning bolt out of the blue stops you in your tracks—tax season is almost upon you!
It’s time to rehash everything that happened last year and spend hours putting numbers into little boxes on forms you don’t understand.
What can you do to get ready for this so it doesn’t turn into a stress-filled experience? How can you avoid staying up past midnight every night the week before April 15th?
A Simple Plan for a Stress-Free Tax Season
First, take a quick trip to your local office supply store. There, pick up an expanding file organizer. Get one with five pockets to organize your paperwork.
Why do you need this? Because tax preparers can charge about $100 an hour or more to prepare a return. Do you really want to pay them that much to organize your receipts? This little organizer will help you sort your documents by category and make less work for your tax preparer.
Label the your organizer’s folders with the following categories:
- Income received
- Receipts for amounts spent to run your business
- Receipts for amounts spent for equipment
- Bank and credit card statements
- Ask my accountant
Organizing your documents and receipts this way usually results in a lower tax return preparation bill.
Collect and Sort Your Documents
Now that you have your organizer set up, you now have to go through your paperwork. Yeah, I know, not a lot of fun. Put on some good music and start looking for the following:
- Income Received. Look for the invoices you sent out to customers. This would also include any 1099-Misc customers sent to you. Check their totals against your records, and be able to explain the difference. If you have an accounting system, your income statement should go here.
- Receipts for amounts spent to run your business. If you spent money in your business, you are going to have receipts for the items you bought. These will help your accountant know what you purchased, and where to put the expense amounts on your tax return.
- Receipts for amounts spent on equipment. Why not include these with the amounts spent to run your business? Because equipment is treated differently on tax returns. Many times, the cost of equipment is allocated over the time it is expected to be used. So you want to include these separately from the receipts for other things you spent on your business.
- Bank and credit card statements. Your accountant will use these to find expenses for which you don’t have a receipt, or for interest income and expense for which you don’t have a receipt.
- Ask your accountant. Lastly, you may have received correspondence that you have no idea what to do with. This section will be a great place to put them, so you can pull them out and discuss them with your accountant.
By making sure you have all the documentation for your transactions, you will not only have the items to include on your return but the supporting documentation of those amounts in case there are any questions down the road.
Review Your Accounting Records
Once you have all your documentation, review your financial results from your accounting system to make sure you have included all your transactions. This will make it easier to complete your business’s tax return. The best way to do this is to reconcile your bank account, which will point out any items you missed that you must include in your accounting system.
Meet with Your CPA
Finally, meet with your CPA. We will usually get much busier as April 15th gets closer. Set up an appointment early to allow us time to analyze your situation, put together a return, and do so some tax planning for the coming year.
While you meet with your CPA, they may ask you some unusual questions. We ask questions so we can make sure your return is complete and correct. Your CPA is definitely not your enemy, we are your ally in the search for a way to cut your tax bill. We just want to help. The more complete your return, the less likely it is you will have trouble with the IRS.
Preparing your tax return is never a walk in the park. If you start early, however, you will be able to make sure your information is complete and there are no issues with your return. If you have any questions on the preparation of a tax return, talk to a tax professional like the author of this article. It is best to understand all your options and not to make a rash decision about how to handle a difficulty.