Small Business Primer for Tax Season

With the passing of the holidays, comes the necessary and dreaded task of preparing yourself and your documentation to report your earnings and deductions to the IRS.  We will go into this a little further next month, but I wanted to give you some preliminary tips to help make the process easier.

• If you paid anyone acting as an independent contractor or compensated a non-employee $600 or more during 2010, you may need to issue a 1099-MISC form to them by the end of January.   This is also true for any rents you paid for real estate or machine rentals.  Generally, payments made to corporations do not require a 1099 form.  Review your income statement to identify all non-employee compensation and rents over $600 and be sure you have a W-9 form on file for each person or entity.  The W-9 form provides the name, address, tax ID number, and type of entity information needed to prepare each 1099 form. 

See specific instructions at this link:  http://www.irs.gov/instructions/i1099msc/ar02.html#d0e624 . 

The W-9 form and instructions can be found here:  http://www.irs.gov/pub/irs-pdf/fw9.pdf?portlet=3 .

 

•  Verify that payroll information agrees with amounts reported on payroll returns and that payroll liabilities agree with year end reports.  Be sure to update any changes to state rates for the upcoming year.  If you do your own payroll, verify employee addresses and social security numbers, and order the necessary number of W-2 and 1099 forms needed (see above).  W-2 forms should be mailed by January 31st.

 

• Get your business bank and credit card accounts reconciled to the institution’s statements.  Review outstanding checks and deposits in transit.  Investigate and eliminate older uncleared transactions, as necessary.

 

• Verify that all of your loan balances and interest paid agrees with the lending institution.  Verify that all interest has been recorded as an expense.

 

• If you have inventory, do a physical count and determine any adjustments to quantity or cost.

 

• Review accounts receivable and determine any amounts that should be written off.  Verify that the allowance for bad debt is a reasonable estimate of potential write-offs.

 

• Review accounts payable for accuracy and evaluate if there are any amounts that you may want to pay in the current year (cash basis).  Enter all invoices received to be paid (accrual basis).  Eliminate any debts on the books that have been forgiven or will not be paid.

 

• Do you have any prepaid items that need to be expensed, i.e., prepaid insurance?

 

• Verify that all major purchases are recorded as assets and that all depreciation and amortization has been recorded for the year.

 

• Are all previous year end accountant adjustments recorded?  Are there any reversing entries that need to be made?

 

• Review all Miscellaneous, Uncategorized, Ask My Accountant, Suspense or other similar types of accounts and reclassify these transactions to the proper accounts.

 

• If you have a home office and do not book any expense until year end or book amounts based on prior year estimates, pull together your year end mortgage interest statements or form 1098, any private mortgage insurance, homeowners insurance, real estate taxes paid, repairs and/or improvements, and utility bills.

 

• If you deduct vehicle expenses, get your mileage log in order and verify that you have the beginning and ending odometer readings for the year.  You will also need any finance charges paid on a business vehicle, business tolls and parking, and the amount of registration or personal property tax expenses paid based on the value of the vehicle.  If you book actual vehicle expenses, be sure that all gas, repairs, tolls and parking, registration, finance charges and depreciation are recorded.

Once all of this is done, I usually review each income statement and balance sheet account for accuracy and consistency in coding, to be sure that monthly transactions have an entry for each month, and that the amounts appear to be reasonable.  It is also helpful to do a prior year comparison, and identify the authenticity of any substantial changes.

So relax and enjoy the holiday, then roll up those sleeves and get to it!  We wish you all a wonderous holiday, and a very prosperous New Year.

Disclaimer: This post is intended to provide general information about the subjects posted.  It should no way be construed as tax or financial advisement.