Tax season can be stressful enough without discovering that your QuickBooks file needs significant cleanup.
Before handing your financial information to a tax professional, you should have a reasonable level of confidence that your books are accurate, organized, and ready for review.
In Episode 42 of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis discuss what it really means for your QuickBooks file to be ready for tax season.
Listen to Episode 42!
Being ready doesn’t mean your CPA needs to take over your QuickBooks file.
Your tax professional should be able to review the financial information, identify potential issues, and use the completed bookkeeping to help optimize your tax situation.
The bookkeeping is your responsibility. The tax strategy is your tax professional’s responsibility.
What Does “Ready” Actually Mean?
When someone says their QuickBooks file is ready for tax season, what should that mean?
At a minimum, you should be able to answer some important questions about your books.
1. Are Your Bank Accounts Reconciled?
Start with your bank accounts and credit cards.
Have they been reconciled through the most recent statement?
If QuickBooks says you have one amount of money and your bank statement says something different, you need to investigate the difference.
Reconciliation helps identify missing, duplicate, or incorrectly recorded transactions.
2. Are There Uncategorized Transactions?
Look for transactions sitting in Uncategorized accounts or other areas waiting for clarification.
These transactions haven’t been properly assigned to the correct account.
Don’t leave them for your tax professional to figure out at the last minute.
Review them now and determine what they actually represent.
3. Are Your Loans Recorded Properly?
Loan payments need special attention.
A loan payment generally includes both principal and interest.
Interest is an expense. Principal reduces the loan balance.
If the entire loan payment is recorded as an expense, your Profit and Loss can be distorted.
Make sure your loan accounts are set up properly and that payments are being recorded correctly.
4. What’s the Status of Accounts Payable?
Look at your Accounts Payable.
Do you have bills that are still outstanding?
Are those bills actually owed?
Do you have a stack of unpaid bills that haven’t been entered into QuickBooks?
Your Accounts Payable should represent what the business genuinely owes.
5. Does Accounts Receivable Reflect What You’re Owed?
Accounts Receivable should represent money your customers owe you.
Review your outstanding invoices.
Are they legitimate?
Are they still collectible?
Are there old balances that should be investigated?
If your Accounts Receivable is inflated with old or incorrect balances, your financial statements aren’t telling the full story.
6. Are Major Assets Recorded Properly?
Review major purchases such as equipment, vehicles, or other significant assets.
Make sure they haven’t simply been recorded as ordinary expenses when they should be treated differently.
Major assets can affect both your Balance Sheet and your tax return, so they deserve attention before tax season.
7. Do Your Balance Sheet and Profit & Loss Make Sense?
Look at both major financial statements.
Your Profit and Loss should reasonably reflect the income and expenses of your business.
Your Balance Sheet should reasonably reflect what the business owns, what it owes, and its equity.
Look for negative balances that shouldn’t exist.
If something looks unusual, investigate it.
Your tax professional needs financial information they can rely on.
8. Review Undeposited Funds
Don’t forget Undeposited Funds.
If money has been sitting there for an unusually long time, determine why.
It may indicate that payments were entered but not properly deposited or matched.
A large or old Undeposited Funds balance can be a sign that part of the sales and payment process needs to be reviewed.
Red Flags to Look For
As you prepare your books, certain issues should immediately get your attention.
Loan Accounts Classified as Expenses
If loan accounts or entire loan payments are being classified as expenses instead of separating principal and interest, your Profit and Loss may be overstated.
Investigate how those transactions have been recorded.
Old Accounts Receivable
Outstanding Accounts Receivable can make your financial position look better than it really is if the balances aren’t actually collectible.
Review old invoices and determine whether the balances are legitimate.
A Stack of Bills
If you have bills sitting on your desk that haven’t been entered into QuickBooks, your books may not reflect your actual obligations.
Enter your bills and make sure Accounts Payable accurately reflects what you owe.
Uncategorized Expenses
Uncategorized transactions are a warning that your books aren’t finished.
Go through them and determine what each transaction represents.
Old Bank Feed Transactions
Don’t let old transactions sit indefinitely in the bank feed.
They may be duplicates, transactions that were entered incorrectly, or items that haven’t been properly categorized.
Investigate them.
Outstanding Payroll Liabilities
Payroll liabilities that are old or unexplained need attention.
Make sure payroll taxes and other payroll-related liabilities have been recorded and paid correctly.
Unreconciled Loans
If you have loans, make sure the loan balances and payments are being reconciled and reviewed.
The loan balance in QuickBooks should make sense compared with your actual loan statements.
Why Find These Problems Now?
You might wonder why you should spend time cleaning up your QuickBooks file before your tax professional even looks at it.
The answer is simple:
You have deadlines.
Businesses have reporting requirements for items such as W-2s and 1099s, and the information supporting those filings needs to be accurate and up to date.
The longer you wait to identify problems, the more difficult it can be to resolve them before deadlines arrive.
Finding an issue in October gives you time to investigate.
Finding it right before a filing deadline creates unnecessary pressure.
Your Tax Professional Shouldn’t Be Your Bookkeeper
One of the most important distinctions discussed in this episode is the difference between bookkeeping and tax preparation.
Your tax professional’s job is to help you optimize your taxes and prepare your tax return based on accurate financial information.
Your bookkeeping is the foundation that provides that information.
You don’t want your CPA or tax preparer spending valuable time trying to reconstruct your books, categorize transactions, reconcile accounts, or figure out why your Balance Sheet doesn’t make sense.
Instead, your tax professional should be able to review the completed financial information and focus on the tax questions that require their expertise.
Think of it as a flyover.
They want to look at your books, identify potential red flags, and determine whether the financial information is ready for tax preparation.
What Does Your Tax Professional Want?
Your tax professional will typically provide a list of documents and information they need.
But before you hand everything over, make sure your QuickBooks file supports those documents.
They want to see clean books.
They want to understand significant changes.
And they want to investigate red flags before preparing your return.
If there are major problems throughout the QuickBooks file, the tax professional may have to spend additional time addressing those issues before they can move forward.
That’s time and money that could often be saved by getting your bookkeeping in order first.
Give Yourself 15 Minutes
You don’t need an entire afternoon to begin.
If you only have 15 minutes, start here:
1. Check the Bank Feed
Look for old transactions that are still sitting there.
Make a note of anything unusual or unresolved.
2. Look at Your Profit and Loss
Does it make sense?
Does the income look reasonable?
Are there expenses that seem unusually high or low?
Are there categories you don’t recognize?
3. Check Your Bank Reconciliations
Are your accounts reconciled through the most recent statement?
If not, make a note of which accounts need attention.
Make a List and Start Investigating
You don’t have to solve every problem in one sitting.
Start by making a list.
Maybe you find:
- Three old bank-feed transactions
- Two unreconciled bank accounts
- An unexplained loan balance
- Several uncategorized expenses
- Old Accounts Receivable
- Outstanding payroll liabilities
That’s okay.
Now you know what needs attention.
You have time to investigate.
Work through the list one item at a time.
Get Ahead of Tax Season
Being ready for tax season isn’t about making your QuickBooks file look perfect.
It’s about making sure the major pieces of your financial information are accurate enough for you and your tax professional to rely on them.
Reconcile your accounts.
Clean up old transactions.
Review Accounts Receivable and Accounts Payable.
Check your loans.
Review payroll liabilities.
Look at your Balance Sheet and Profit and Loss.
Review Undeposited Funds.
Investigate anything that doesn’t make sense.
Then your tax professional can do what you hired them to do—help you make the most of your tax situation using financial information they can trust.
The Bottom Line
Tax season shouldn’t be the first time you discover problems in your QuickBooks file.
The earlier you identify issues, the more time you have to understand them and correct them.
Your bookkeeping provides the foundation.
Your tax professional uses that foundation to prepare and optimize your taxes.
So before tax season arrives, ask yourself:
Are my books accurate enough that I trust the numbers?
If the answer is no—or you’re not sure—don’t wait until your tax deadline is approaching.
Start with 15 minutes.
Find the red flags.
Make a list.
And start getting your QuickBooks file ready.
If you liked the podcast, you will like our training course. Click on the link below to join our upcoming course.