Accurate accounting records are the basis for an effective tax filing procedure. Whenever bookkeeping and tax returns are done independently without proper integration, discrepancies might occur, leading to problems and further effort. Professional outsourced accounting services could assist companies to maintain well-organized accounting records and assure that the financial data used in preparation of the tax returns are properly checked and synchronized through the entire year. It doesn’t imply that all the figures from one set of books should appear exactly in the same way in a tax return, as there might be special tax requirements necessitating some changes.
With timely reconciliations, continuous recordkeeping, and cooperation between accounting and tax professionals, a company would be able to sustain well-prepared books and enter the tax season confidently.
Why Books and Tax Filings Need to Match
Your bookkeeping records act as the financial basis for making a tax return of the company. It contains all records of income, expenses, assets, liabilities, payroll transactions, and all other financial activities for the entire year. When it is time to make a tax return, this is then analyzed and modified if necessary.
The books and the tax returns need not always contain the same amount in their respective records. Accounting practices differ from tax regulations. Sometimes there is an expense that you record for your accounting purpose, but it is treated differently in your tax return.
This is important as long as it is known.
Bookkeeping and tax alignment helps create a clear connection between the company's financial records and its tax reporting. Without that link, the tax preparer could spend extra time researching transactions, asking for documentation, and finding out the reasons behind the discrepancy.
Well-maintained books could answer crucial questions such as:
- What are the sources of income for the business?
- How was the large expenditure classified?
- Are there reconciliations for the bank account and credit card?
- Is the payroll complete?
- Have there been any important transactions documented?
- Is there an appropriate record for the tax adjustment?
That would make tax preparation more efficient and eliminate the possibility of working with incomplete and inconsistent information.
For instance, consider a business that keeps $15,000 worth of car expenses in its accounting records. For the purpose of the tax preparation, only a part of those expenses may be considered tax-deductible according to the tax rules. The accounting books will continue showing the full amount of business expense, while the tax return will reflect the tax treatment of the transaction.
Here is where the problem does not lie in the books being incorrect. The point here is that the adjustment was spotted and explained.
What Happens When They Don't
Misalignment between bookkeeping and tax accounting can cause extra work in even a seemingly small mistake.
Let us assume that the business records an $10,000 expense within its accounting system. In the process of tax preparation, the tax specialist realizes that only $7,000 must be deducted from taxes under the respective rules and documentation.
The fact that this difference was never noted or described can raise the question as to why they do not match.
The tax accountant needs to:
- Verify the initial transaction
- Ask for any invoices or receipts
- Find out how the expense has been categorized
- See if there is a need for an accounting correction
- Record how it has been deducted from taxes
- Resolve the difference prior to completing the return
These situations can be found in many other areas: income, depreciation, payroll, transactions with owners, loans, inventories, etc.
It doesn’t necessarily mean that the business has done something wrong. The aim of accounting and tax filing is different and it is normal if there are some differences. But they become a problem if no explanation is given.
Coordination problems can also lead to delays. This is especially true when the tax preparer is provided with incomplete or out-of-date accounting documents. Such delays are likely to make the tax season even more stressful for the business owner and the experts who are working on the case.
Maintaining accurate tax filing records throughout the year helps reduce this problem. Instead of reconstructing financial activity months later, the business can address discrepancies as they appear.
How Tax and Accounting Services Keep Records Aligned Year-Round
There are some key steps that should be considered for the most efficient coordination of taxes and accounting.
The process may start even before the tax season as the combined service provider has the opportunity to create an ongoing process where the information from accounting is analyzed, reconciled, and compiled with future tax filing needs in mind.
Some of these steps include ongoing account reconciliation, where bank accounts, credit card payments, loans, and other accounts can be reconciled with the accounting records.
Another step may involve analyzing large or unusual transactions, such as large purchases, asset sales, loans, owner transactions, and business structure changes, since these transactions can influence both financial statements and tax filing.
The organization can also maintain organized supporting documentation, such as receipts, invoices, payroll, statements, and other necessary documents.
Coordination may involve:
- Bookkeeping on a monthly basis and account reconciliation.
- Unusual transactions review.
- Expense categorization.
- Accounts receivable and payable analysis.
- Payroll document reconciliation.
- Recording of fixed assets and depreciation.
- Accounting adjustment documentation.
- Accounting and tax professional coordination.
- End-of-year review prior to tax return preparation.
This method allows for the creation oftax ready books and not the need for waiting for tax filing time to determine if books are ready.
It also allows for better audit documentation since if an accounting number needs adjustment on the tax side, the professionals will be able to understand why it needed adjustment and keep the documentation.
It is important not to try making financial books comply with tax preparation requirements but ensure that there is explanation and documentation for all variances.
What This Looks Like in Practice Month to Month
Coordination throughout the year will become simpler by making it a process rather than a yearly undertaking.
Each month at the start, the accounting staff will be able to conduct their usual bookkeeping work and reconcile their transactions in the previous month. Bank and credit card statements can be reviewed against the accounting entries and any missing information can be determined.
Throughout the month, any unusual transaction may be flagged. This could include the business buying new equipment, borrowing money, distributing money to owners, or receiving a large payment from a client.
These items will not be left until year-end but will be noticed and reported to the tax preparer as needed.
An easy monthly procedure would involve the following steps:
Step 1: Enter Transactions
Transactions regarding income, expenses, payroll, purchases, and other financial transactions are recorded.
Step 2: Reconcile Accounts
Account balances from banks, credit cards, and other accounts are reconciled with the records.
Step 3: Check for oddities
Odd transactions are spotted for special consideration.
Step 4: Document
Documents are organized and retained.
Step 5: Spot items for tax treatment
Items to be treated differently for tax purposes can be flagged.
Step 6: Communicate material changes
Changes in the business, new purchases, financing activities, and other such information can be conveyed to the relevant professionals.
Step 7: Review YTD Records
Periodic review of year-to-date records helps to verify their completeness.
This process supports reconciliation books to tax return because the information is reviewed progressively rather than reconstructed at the end of the year.
How This Makes Tax Season Faster
With consistency of books being kept all throughout the year, tax preparation begins with the ability to use a more organized financial picture.
By eliminating the necessity of fixing problems at the beginning of tax time, the tax professional will have more time to concentrate on analyzing the data, making appropriate adjustments, and preparing the returns.
This can help the process be completed much more quickly.
First of all, there will be fewer gaps in records, which require follow-ups. Second of all, having reconciled accounts increases the level of certainty about completeness of financial information. Finally, having documented differences between accounting and taxation will enable addressing them quickly.
Consistent information throughout the year can also increase the predictability of tax season for business owners. By knowing about potential problems in bookkeeping at the time close to when they happen, instead of discovering something unexpected months later, owners can resolve them more effectively.
Year-round coordination of bookkeeping and taxation with The Fino Partners can also contribute to better interaction between accounting and tax specialists. With consistent information available for both teams, the likelihood of using different versions of financial records will be lower.
