If you are a business owner who is maintaining your own books, there are a number of mistakes you may make over the course of the year that will not become evident until tax time. If this is the case, assistance from a virtual CFO or outsourced accountant/bookkeeper in maintaining your financial records on an on-going basis will make tax prep a breeze and eliminate these common tax time problems.
1. You filed an extension because you couldn’t supply your tax information to your tax accountant by their deadline. Or your books are in such bad shape that your tax accountant made you file an extension so they could clean them up over the summer.
If you filed an extension following an otherwise normal business year, then you need help staying on top of your financial records year-round to eliminate the year-end crunch. An outsourced accountant will maintain your books on an ongoing basis, ensure all transactions are categorized correctly, and perform frequent account reconciliations. By keeping a careful eye on the books throughout the year, it is easy to prepare the tax information in January because the work has already been done. Your virtual CFO can also suggest tax saving strategies during the year, allowing you to take advantage of them before year-end.
Furthermore, keeping your books clean can mean less expense for tax preparation. If your tax accountant knows your books are in good condition and will not require significant clean-up, he or she may charge less for tax preparation services (see #2 below).
2. Your tax accountant made a lot of changes to your books or added several correcting journal entries. Or worse, the income and expense numbers on your tax return are wildly different from those in your P&L.
If you didn’t do the clean up work described in #1 above, then who did? If you did not keep your books in an orderly and tax-compliant manner, then it must have been your tax accountant. Some tax accountants make corrections to individual transactions in your bookkeeping system, others “brute force” the corrections through year-end correcting journal entries, and still others don’t fix anything in your books and just put their corrected figures on the tax returns. This also means your financial data was incorrect during the year, making it difficult for you to make informed business decisions.
A virtual CFO or outsourced accountant/bookkeeper understands how your financial records should be kept. It is very important for your books to be updated on an on-going basis to provide you with an accurate picture of your organization’s performance. Using clean and up-to-date financial data, you can do a better job managing your company. And a perk is that your information won’t require corrections at tax time!
3. You are not compliant with mid-year tax filings.
Payroll taxes should be paid in each pay period. If they are not, there are significant financial and even criminal penalties. Additionally, there are sometimes other state and local taxes need to be paid during the year.
I recently had a new client who received a notice from their bank that their state Certificate of Good Standing had lapsed. Upon some investigation, it turned out that in the prior year the owner had forgotten to submit the business’ personal property tax return. We submitted the return late and paid the penalty to have the certificate restored.
A good CFO will notice if your ongoing tax responsibilities are not being fulfilled.
4. You owed a lot in taxes (or got a huge refund).
Ideally, when you prepare your tax return, your taxes due or refund will be pretty close to $0. That means you have been paying the correct amount over the course of the year through both payroll deductions and quarterly estimated payments. Everyone hates getting a big tax bill in April, but why is it bad to receive a refund? There are several reasons. In addition to giving an interest-free loan to the government, you have lost the opportunity to use that money to build your business. Did you borrow money during the year for an equipment purchase? Did you skip a marketing opportunity because you didn’t have the money? If so, then that refund of your tax overpayment had a real cost associate with it.
Typically, small business owners need to make quarterly estimated payments and they have income outside of regular payroll withholdings. The team of your virtual CFO and your tax accountant can help determine the correct amount for you to pay in estimated taxes, avoiding tax sticker-shock in April and freeing up cash for you to reinvest in your business.
In all of these scenarios, there are several problems that should concern you as a small business owner. Working with a virtual CFO or outsourced accountant/bookkeeper can help solve them and make gathering your year-end business tax info a breeze. Plus, your tax accountant will thank you for making their job easier!