small business taxes

Last Updated on December 9, 2021

It’s the end of the year, which means it’s time to do your annual accounting. You may not think this is a big deal, but if you want to avoid paying penalties and interest on taxes owed at the beginning of next year, then now is not the time to procrastinate. This article will walk you through the steps necessary to ensure that your books are ready for tax time.

Check Your Inventory

Prepare an inventory of all items currently stored in the business’s fixed assets account, including purchase price, date acquired, current market value, and the accumulated depreciation.

Record All Sales

Record sales for goods or services provided during the year but not yet invoiced (i.e., unbilled revenue). Include customer billing information (name, address), plus details about how much money was collected and when payment was received. If exact dates aren’t available, it could be helpful to use a range of days.

Account for Employee Bonuses

If the business has non-income items on its books for this year that it did not have at the beginning of the year, you’ll need to account for them. For example, a business may pay out quarterly bonuses to employees during the year. To account for those bonuses on tax day, the business would need to defer recognizing them in their income statement until the company has paid them out.

Generate W-2s

If the business has employees, then it will need to prepare W-2s for each of them. Prepare a set of W-2 forms and ensure they are delivered to each employee before the end of the year.

Prepare Any 1099s

If the business has any non-employee service providers (such as independent contractors), they should be sent 1099s.

Backup All Your Data

It’s best to save all of your records in multiple locations so that just one backup copy won’t be responsible for losing business data. In addition, if these backups are stored offsite, you can make sure they are protected by encryption.

Change All of Your Existing Passwords

If any of your account logins or passwords are shared, make sure to change them after the year. Changing your passwords ensures that no one who has access to old data can use it for their purposes, even if they’re no longer working with you. In addition, determine which password should be used by your third-party accounting service and change it as well.

Calculate Expenses for Meals and Entertainment

If you paid any expenses for meals and entertainment, make sure to calculate the amount of these expenses; only 50% of them are deductible. Next, you’ll need to determine which meal or entertainment expenses qualify as deductions and how much each is worth relative to your location.

It would be best if you also recorded travel expenses for your business trips during the year. If you have employees, you’ll need to figure out how much of their travel expenses are tax-deductible.

Prepare an Invoice Listing All Income and Expenses

Prepare a list of all income from the year, including additional items such as reimbursed employee expenses. In addition to recording amounts due from customers, include all current liabilities (such as accounts payable).

In addition, you may need to record donations received by the business but not yet registered on the books. Finally, document all expenses incurred during the year for items that you have already paid.

Build Tables for Income and Other Changes

Fill out a table showing all changes in income over the year. Along with providing columns for each month of the year (listed chronologically), include two separate columns: one that shows income after subtracting any change in ownership interest; and another that subtracts all operating expenses from revenue.

Build Adjustments for Depreciation Expense and Depletion Cost

Since certain assets lose their value over time (e.g., physical capital), they will affect your business’s bottom line after a specific number of years due to depreciation expense. Therefore, in cases where property was acquired or sold during the year, you should list all relevant information and any recorded depletion cost.

Gather Tax Documents

It’s a good idea to make a list of all other potential forms that may need to be included in your filing. These include W-2s from employees who have been paid during the year; 1099-INT and 1099-DIV for interest income on investments; 1099-G for unemployment benefits received; and any other necessary tax documents.

Make Year-End Adjustments

Before you can prepare your year-end adjusting journal entries, it is helpful to make a list of other potential adjustments that may be necessary. These will include any other extraordinary gains or losses from the year (e.g., disposal of assets held for sale, casualty, and theft losses).

Also include any income recorded in quarters that span different years (e.g., estimated quarterly payments received in 2019 but accrued in 2020).

Prepare Your Tax Returns

If you are filing for a calendar year, then make sure to pay quarterly estimated taxes before the end of each quarter. Also include any other documentation that may be necessary (e.g., W-2s, 1099s). Then use the information from these returns when completing your tax return.

Prepare a Trial Balance

You may have heard that you should prepare a trial balance at the end of the year. A trial balance is simply a list of all your general ledger accounts with their corresponding debit balances. If you’ve done everything correctly, this list will show total debits equal to total credits with no balances in any income statement accounts (e.g., revenue or expense).

This means that your over/underapplied amounts are zeroed out across all income statement accounts.

Compute Final Income Statement Accounts

Once you enter all of your adjusting journal entries into your ledgers, it’s time to move on to the final step of compiling each income statement account for the year provided by various sources. This statement will include revenue from invoices and payments received minus amounts applied to accounts such as bad debts.

Budget for the Following Year

At this point, it is now appropriate to prepare next year’s budget. This will include any taxes you need to pay before the end of the quarter (e.g., estimated taxes) and any other special costs (e.g., legal fees for negotiating contracts with vendors).

Close Out All Your Books

Once your financial statements are complete, it is time to close your books by removing all entries made during the tax year into suspense accounts and then shifting those amounts into permanent accounts.

Also, close out all remaining balance sheet accounts so that their balances equal zero at the end of the tax year. For example, if you’re using double-entry accounting, you should have an unadjusted entry for both an asset and a liability in your general ledger. Close those accounts so that the debit and credit balances match.

Conclusion

If you follow the above step-by-step approach, you should prepare and compile your annual financial statements with minimal stress and hassle. But, of course, if you need help with any part of the process, you should feel free to contact your certified public accountant or financial advisor, if you have one.