Getting Tax-Ready in 2012, Part 1 – Get Organized!

April 15th is coming soon!  Are you excited?!  I know you dream of this all year long.  Staying up late at night with your receipts, trying to catch up on your accounting… all so that you can pay Uncle Same a nice fat check.  Am I right?!? 

As much as I love the numbers of business and their ability to help me make solid decisions, I detest getting all my accounting ready for taxes.  AND – I hate paying taxes.  But, such is life.  There is nothing more certain than death and taxes.

I’m going to help you get you ‘tax-ready’.  Keep in mind, I am not a tax expert.  (You need to hire one of those.)  But, these tips should give you a good basis for preparation.  Make sure to jump ahead to the section that applies to you…

Image: Creative Commons

1 – Get Organized

 Have you been separating your receipts each month?  Are they organized?  If so, skip to #2.  If you have an ugly box of denial, read here…

As I’ve said before, accounting is 80% organization and 20% perspiration.  If you haven’t been good about being organized, you’ll need to do some catch up.  I have been in the ugly position of having a year’s worth of receipts in a big bin that I had to sort thru for good ol’ Uncle Sam.  UGLY!  (New motherhood took its toll on me in 2007.)

So here’s what you do:

• Go thru the box o’ denial piece by piece and sort each expense receipt, each client invoice, each bank statement etc.
• Sort each receipt by month and separate them into 12 files (one file for each month).
• Make sure you have a bank statement for your business bank account for each month.  If you are missing a few months of statements, download them from your online banking information.   (If you don’t have a separate bank account for your business, go back and read Accounting 101, get a separate bank account NOW, and start highlighting your business expenses from 2011 on your 12 months of personal bank statements.)

If you ended up 2011 with a huge box of denial, you certainly don’t want to be in that position next year.  There’s nothing like the present to get yourself ready for 2012 taxes next year, so go back and read Accounting 101 for total organization and start moving in a positive direction for this year.

2 – Create your accounting records

Have you been updating your accounting records monthly?  If so, skip to #3.  If you have a ton of data entry catch up to do, read here…

If you have not been inputting your accounting records on a monthly basis, you’re going to  have to do all of your inputting now.  This can take a few days depending on the number of transactions. So grab a few bottles of wine and sit back. (But not tooooo many bottles of wine.  We want accuracy here.)

The easiest way to create your accounting and catch up is to go through your 12 months of bank statements, line by line:

• Use your bank statements (starting in January) and start to identify all of the transactions: cash going in, cash going out.
• If you use Quickbooks (or other accounting software) start inputting them.  (The Accounting 101 tutorial gives great basics on this.)  If you do not use any accounting software, I don’t know if I’d recommend starting at this juncture.  Because of the learning curve, software is better for when you can move forward – not for when you are playing catch-up.
• If you don’t use software, start inputting the transactions into an excel spreadsheet:
• Date
• Payee
• Amount
• Description
• Category aka Account (what type of transaction was this? marketing expense? phone expense? advertising expense?)
• You’ll want to make sure to have a separate Excel sheet for each type of transaction. (One for expense receipts – cash going out.  One for client invoices/contracts – cash coming in.)
• As you go thru each month, look thru your receipt files (that you compiled in section 1).  Check to see that you have a receipt to back up the transaction on the bank statement.  (This is uber-necessary in the chances that you are audited.)  If you do not have a receipt, see if you can go back and get one.  (If it was an online charge, you should be. If it was a retail purchase, you won’t be.)  Just make a note of any receipts you do not have and make a sign of the cross (or sacrifice a chicken – whatever your religion prescribes.)
• Make sure to do the same for any business credit cards you have.

3 – Create Accounting Reports

This is where having accounting software can save you some minutes in the proverbial nuthouse.  The reason I am obnoxiously adamant that people use accounting software for their businesses is the ability to generate accounting reports.  People spend years in college (I did!) learning how to put these reports together.  But, with Quickbooks you can do it with a touch of button.  Unless you have some accounting in your bones, you will not be able to make these reports.  (I’m sorry.)

These are the reports your accountant may ask you for, depending on the structure of your business (corporation, partnership, LLC, LLP, sole proprietorship):

• Balance Sheet for 12/31/2011
• Profit & Loss for 1/1/2011 to 12/31/2011

Nowwwwww… I don’t want to scare you too much.  If you don’t have the Quickbooks, your accountant MAY be able to work around this if you give him or her a listing of all your expenses (cash out) and all of your client invoices (cash in).  Accountants can be cool like that.  But, spare yourselves some misery in 2012 and get yourself some accounting software ASAP.

And… there’s more!

Come back tomorrow.  I’m going to share with you some tax-saving tips and how to find an accountant that rocks.