Tax season may become extremely hectic for small business owners since they will be looking for receipts, financial statements, payroll sheets, and many other documents. Properly preparing the right information can go a long way towards streamlining this process and avoiding any possible delay that might arise. Seeking the help of tax preparation services for small business help owners know what kind of documentation they require and have all their documents in place before filing commences.
Whatever method is used to prepare the taxes for the small business, be it internal, or even via tax preparation outsourcing, proper documentation is key. It enables the tax professional to get a better understanding of the business activities.
9 Documents Every Small Business Should Prepare for Tax Season
These nine items provide the financial data that the tax professional requires to file the correct return. Early preparation of these forms can also help in detecting problems regarding incomplete documentation.
1. Profit & Loss Statement
The profit & loss statement, also known as an income statement, is a financial statement that outlines the total income and expenses of the business over a certain period.
The following information will usually be found on it:
- Total income
- Expenses related to cost of goods
- Operational expenses
- Salaries and payroll expenses
- Miscellaneous expenses
- Net income or loss
This document provides the tax preparer with vital information concerning the financial dealings of the business for the current tax year.
Incomplete record keeping may prevent an analysis of the completeness of the income and expense data. Businesses should verify their accounting records before submitting this statement to their tax preparer.
2. Balance Sheet
- Balance sheet reflects the financial position of the company on a particular date.
- It usually contains the following:
- Assets
- Liabilities
- Owners/shareholders’ equity
- A balance sheet may serve to analyze business checking accounts, accounts receivable, borrowings, equipment, and any other assets by tax practitioners.
- If an accounting system is used by the business, the current balance sheet will make the tax preparation process easier.
3. Bank and Credit Card Statements
Bank and credit card statements confirm the transactions that were entered in the accounting system.
These statements may reveal any missing and wrong transactions.
Before starting tax preparation, it is important to get all bank statements, which were used for the business activities.
Why Reconciliation Matters
Just receiving statements will not work. The transactions included in the statements must be analyzed against the transactions entered in the accounting system.
The analysis may reveal the following problems:
- Missing transactions
- Duplicate transactions
- Wrong amounts
- Unidentified transactions
- Wrong bank charges
- Outstanding transactions
Completing reconciliations early gives small business tax preparation professionals cleaner information to work with.
4. Payroll and Employee Tax Records
Companies that have employees require additional documents as well.
The employers will need to compile the necessary payroll documents which may include information relating to employees' salaries and payroll tax filings.
In light of the nature of the company, the tax preparers may require information from:
- Payroll documents
- W-2 Forms
- Employer payroll tax return forms
- Payment records for contractors
- Employee benefits and retirement plan records
- Year-end payroll documents
The payroll documents may also be required to be reconciled against the financial statements.
Any discrepancies between the payroll documents and the accounting documents should be sorted out before compiling the tax return document.
5. Documents Pertaining to Loan/Financing
Companies that have taken loans or any other form of financing should compile year-end documents for them.
Such documents could help determine:
- Outstanding loan amount
- Amount of interest paid
- Amount of principal repaid
- Any other relevant financing transactions
- Any borrowing undertaken during the year
Distinguishing between the principal and interest is important since their accounting/tax treatments may differ.
Documents for any financing entered into during the year should also be included.
Loans records can be compiled to enable easy understanding of liability movements by the tax preparer.
6. Fixed Asset and Equipment Records
Businesses that have acquired equipment, vehicles, furniture, technology, and other substantial assets must collect relevant information regarding purchases.
Documents that might be helpful include:
- Purchase invoices
- Receipts
- Financing contracts
- Descriptions of assets
- Dates of purchase
- Amounts paid
- Information regarding disposal or sale of assets
The tax professional needs the above documents in order to determine how the business assets should be taxed.
Why Asset Records Should Be Prepared Ahead of Time
Asset-related tax treatment is subject to such things as depreciation, etc., depending on the nature of the asset and the time of its placement in service according to tax requirements.
Collecting documents ahead of time gives the tax preparer the chance to review information instead of trying to piece together asset acquisitions at the last moment before filing taxes.
Businesses should not make assumptions as regards the tax treatment of all large acquisitions.
7. Business Expenses Documentation
Documents and supporting material will verify business expenses accrued during the year.
The following categories of expenses require proper organization of documentation:
- Rent
- Utilities
- Insurance
- Advertising
- Travel
- Professional Services
- Office Expenses
- Technology and Software
- Supplies
Don't Wait Until Tax Season to Organize Expenses
A frequent issue encountered in small business tax preparation occurs when one tries to reconstruct a whole year's worth of expenses all at once.
Businesses that keep their record keeping in order all year round can make tax preparation much more convenient.
When receipts are not clear or not available, the tax preparer may need extra documentation in order to finish the tax return.
8. Sales Tax & Other Tax Information
Businesses that remit sales tax or conduct business in several states should start collecting the related tax information.
Some of the information that needs to be gathered can be:
- Sales tax returns
- Sales tax payments
- State tax correspondence
- Registrations
- State and local tax reports
- Notifications sent by the tax authorities
This is especially true for businesses that sell their products on the internet or conduct business in several states.
Each state has its own requirements for registrations and tax filing. Business should inform their tax preparer of the states in which they are conducting business.
9. Prior-Year Tax Return and Tax Notices
Another critical item that should be kept ready is the tax return of the previous year.
The information available in a prior-year tax return can be helpful for:
- Carryforward items
- Depreciation
- Prior-year balances
- Business type
- Priorly reported income
- Tax estimates paid
- Information that may need to be checked again
Tax notices or any tax correspondence from the IRS or state taxing authority should be provided by the business.
Significance of Tax Notice
A tax notice will generally have some question or issue that needs to be addressed while preparing the taxes for the year.
Neglecting the tax notice may lead to difficulty in addressing the underlying problem.
How to Organize These Documents Before Tax Preparation
Although collecting nine types of documents might appear daunting, there is an easy way to do so.
Businesses can set up a folder for their tax preparation that will include the following:
- Financial statements
- Statements from the bank and/or credit cards
- Payroll
- Loan papers
- Assets
- Expense papers
- Sales tax
- Previous years' tax returns
- Correspondence from the tax authorities
Folders can be organized by type of document and year of taxes.
The business should also keep a list of things to talk to the tax preparer about.
How Tax Preparation Outsourcing Can Help
Some small businesses do not have enough internal accounting or tax expertise to manage the entire preparation process themselves. In these cases, tax preparation outsourcing can provide additional professional support.
Outsourcing can be used by companies to arrange the necessary financial information, produce required schedules, review documentation, and coordinate information needed for tax purposes.
These responsibilities vary depending on the particular agreement. Tax preparation service provider can cooperate with the existing accountant or certified public accountant of a company but not replace an accounting system in whole.
When Outsourcing Is Beneficial for Businesses
Tax preparation outsourcing is beneficial for businesses when:
- It requires too much time internally
- A lot of organization is required for financial statements
- Company has various sources of income
- The company works in several states
- There are issues with capacity during tax season
- The internal staff lacks experience in tax preparation
But still, tax preparation outsourcing will not relieve business owners from their obligation to supply information accurately.
Early tax document preparation can make tax season easier for small businesses. Financial statements, bank documents, payroll documents, documents for loans, details about assets, expenses, taxes, and previous year returns can make up a better picture of the business.
And the sooner the documents will be collected and analyzed, the easier it would be to find out what information is lacking and solve problems regarding tax season approaching. Organise them with outsourced tax preparation services form The Fino Partners to get clarity on finances.
