26. How to Get Ready for Tax Prep

It's tax season and that often brings a lot of stress, handwringing and anxiety to business owners.

But tax prep can be a breeze if you are prepared.

Before you go to your tax preparer, there's some easy steps you can take to reduce the questions you get from your tax preparer and makes sure you've maximized your deductions.

🎧 Tune into this week's episode and be prepared for your smoothest tax season ever. You'll learn:

 ▶️ QBO housekeeping tasks you should do before going to your tax preparer
 ▶️ Key deductions that are not part a part of your bookkeeping
 ▶️ Tips for managing receipts to make tax prep easier
 ▶️ How to prepare for tax season if you don’t have a bookkeeping system

Mentioned in this episode:

• Continue the conversation and book a free call
• Get your Simple Financials Bookkeeping template

Other resources:

• Get Your 30 Days of Money Mindset Prompts

For the full show notes, including the transcript, go to www.carlamoats.com/podcast/episode26

DISCLAIMER: The information in this podcast is for informational purposes only and does not constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, we assume no liability or responsibility for any errors, omissions or regulatory updates.

Transcript

Welcome to Purposeful Profit, where I help you take your business to the next level. I'm Carla Moats, Finance and Strategy Coach and Fractional CFO for high-achieving female entrepreneurs. I'm here to empower women to build wildly profitable businesses that give them the freedom to live their dream lives. I'll use my more than 30 years of finance and consulting experience to take the mystery out of your finances and help you make more money, and go after your next big thing.

Hi there, and welcome back to the Purposeful Profit Podcast. I'm your host, Carla Moats, and I am a financial accounting expert. I am your financial whisperer. I work with female founders. I help them simplify their business finances so they can put more money in their pocket. And this week we are talking about taxes. It is tax season here in the US. It is a time that causes a lot of stress and a lot of hand-wringing with a lot of business owners. Just as a reminder for you, if you have a calendar year end, which I'm going to guess most people listening to this do, your individual tax returns and C-Corp tax returns are due on April 15th, and if you have an S-Corp or an LLC filing as an S-Corp, that return your 1120-S is due on March 15th.

And a lot of the anxiety that business owners feel because they don't know what they don't know, they aren't sure what to provide or they are not prepared. And you can really breeze through tax season when you are prepared. When you're prepared, it's just the stress just melts away. And that's what I'm going to do in this episode. I am going to help you get prepared.

So in today's episode, you're going to learn some QBO housekeeping tasks that you should be doing before you go to your tax preparer. I'm going to talk to you about some key deductions that are not part of your bookkeeping and that you want to think about. I'm going to give you some tips for managing all those receipts to make tax prep easier. And then I'm going to talk a little bit at the end about how to prepare for tax season if you're not on QBO or you do not have a bookkeeping system. And of course, when I talk about taxes, I put out my legal disclaimer that my attorney requires the information. This podcast is for educational purposes. It is not intended as a substitute for your own personal tax advice, so please seek out your personal tax professional for advice regarding your personal tax situation.

But first let's dive in and start from the ground zero. Let's talk about who needs to report business income. If you have any business income at all, and even a dollar or even $100, you are required to report it. There is a threshold, a minimum  for which you have to pay self-employment tax. But anybody who has any income,   needs to report their income. Even if you have no income. If you have no income this year, maybe you're a new business, you have no income, but you have expenses, or you have expenses in excess of your income, you still want to report it because you can still take a loss on your on your tax return. Again, your tax advisor can help you with that. If you have a hobby, it's not a business, you also have to report the income, but you can't deduct any expenses. So if you have something in your conducting, it really is a hobby and not as a business, be forewarned. You're going to pay taxes on the income, but you can't deduct the expenses.

When you go to your tax professional, most legit taxpayers are going to have some type of online organizer or questionnaire, you'll complete that and will help them gather information. When I worked in tax corporation, I don't know, 20 years ago, we had this huge, humongous, probably four-inch thick tax organizer packet that would go out to our clients that they had print for us. It's all pretty much all digital now, but that will allow them to gather a lot of the information that they need. You'll provide the normal information for your personal tax return. If you have a day job and you have any W-2’s, you'll provide that. If your husband has any type of income, rental property, all the things you would normally report if you didn't have a business, you'll report those, but you're also going to provide information on your business income and expenses. What most tax preparers will do now, as soon as they find out you have a QBO is they will just want access to your QBO account. You have, as part of your subscriptions, you get accountant users and you get, for most versions, you have two accountant users, so one will be your bookkeeper, typically one will be your tax professional. And then, they will give them access to go in and they will pull the financial data themselves, any type of reports that they need. One thing to keep in mind is if you have an outsourced bookkeeper, your bookkeeper should be available to work with your tax professional. Some will charge you for it, some won't. Any of the bookkeeping packages that I have, I work collaboratively with their tax pro at the end of the year to provide them any information they need to answer any questions that they have.

Before you go to your tax pro though, you really want to do some QBO housekeeping. And if you have a bookkeeper, this should all be part of the year end review. If you don't have a bookkeeper and you're doing your books, your DIY-ing and your books, these are things you'll want to do. But make sure if you have a bookkeeper, there's anything that I'm going through in this list that should be stuff that they are already doing or already discussing with you. If they are not doing a year end review with you, by all means, reach out to them and tell them you want to have one. One thing to keep in mind is to go through this list. This list is not all inclusive. This isn't everything that they should do for year end. I really made a list of tasks that are specific to being able to get your taxes ready. So there are other things I'm doing in my year interviews with my clients right now. There are things that I'm doing above and beyond this list, but at a minimum, this is what you want to do before you have your tax preparer get into QuickBooks and start working on preparing your tax return.

Another thing to keep in mind is when your accountant user has access to views and QBO that you don't have, there is a book review and there is an overview that just comes with the accountant’s review. So they have the ability to go in and really easily, you see the status of all the different types of transactions you have. And it also, the books review is set up by QuickBooks to tell you things that you should be looking, as a bookkeeper, things you should be reviewing and making sure are cleared up, that's something your account will be able to look at—things that you want to do for your housekeeping. So one thing is you want to make sure all your bank accounts are reconciled. When I say bank accounts, I'm talking about savings and checking accounts, credit card accounts, lines of credit or loans. This also includes PayPal. I also reconcile Stripe accounts. Basically, there's a reconciliation function in QBO, in your bookkeeper will know how to do this. And if you are doing your own books this is something you'll want to know how to do. Make sure they're all reconciled. This is basically making sure that what is on your bank account ties back, or could be reconciled to your bank statements.

If you have payroll, if you have W-2 employees and this would include yourself, if you're an S-corp, you're going to have at least yourself as a W-2 employee, make sure all your payroll accounts, both your P&L accounts, like payroll expenses, as well as any liability accounts you have, these are getting reconciled back to payroll registers and returns to make sure all of your payroll expenses have been recorded properly. You want to make sure you don't have undeposited funds or uncategorized assets. These sit on your balance sheet, so you'll run a balance sheet and you'll look for these two items under positive funds or uncategorized assets. The reason I want you to look at these is, these are transactions that are not fully processed. They're sitting on your balance sheet, and they haven't been completely processed. I want to clear these accounts out before the end of every year. So again, if you pull out your balance sheet, if you don't see these accounts listed, then you're good. But again, you can go directly to your bookkeepers and ask for validation. “Can you validate for me that I don't have any deposited funds or any uncategorized assets”, and ask them to show you how they know that. Again, if a client comes to me and asked me for that, I could do it a couple ways. I can show them a balance sheet, and I can also take them to one of these special accountants' views, and I can show them on those screens that they don't have any.

One thing I want you to do and make sure your bookkeeper does is have you review your owner distributions. Owner distributions are basically money that has been paid out of the business to you. This is an S-Corp and we'll call it an over dividend. If you're a sole proprietor it's usually called an owner draw or an owner distribution. These are not expenses of your business. These are basically returns of money from the business back to you as the owner, and so they are not expenses of the business. So one of the things you want to look for in owner distributions is, you want to make sure nothing got quoted incorrectly to owner distributions that is really a business expense. I took over a client recently and we pulled up their owner distributions, and there were a bunch of small dollar amounts in there, and they were Amazon charges. And every time the bookkeeper sent it to Amazon, they just threw it into distribution. But when the business owner went back through their Amazon, a lot of these were business expenses. So again, if you got anything in there that's a business expense, you're going to want your bookkeeper to get them coded correctly onto your profit and loss statement, your expenses in the appropriate categories.

Another thing I want you to think about is, are there any business transactions you paid out of personal funds? I always tell people to really pay all of their business expenses out of a business, off of a business credit card, or out of a business account, that's the ideal scenario. But there can be mistakes. This year, I would think I was out at an Office Depot, and I have my business in my checking or my personal checking, in my business checking at the same bank. And I accidentally pulled out the wrong debit card, and I paid for a bunch of business expenses on my personal debit card. Work with your bookkeeper to run any of these through your business as either a reimbursed business expense or an owner investment. Some things to make sure that you're counting is business expenses. Any type of business attorney, if they're doing your will, or divorce, or custody or something like that, that's a personal expense. But anything they're doing for you that's business related, you want to run through your business. Accountants, your tax preparer, take that as a business deduction. Often when you're paying your tax preparer, let's say you're an S-Corp, they're preparing your S-Corporate term, but then they're preparing your individual return, that's all expenses of the business. So, I would run that through as a business expense, business insurance. We're going to talk later about medical insurance, that's not what I'm including here, this is any type of business insurance. So if you have any general liability insurance, any errors and omissions insurance, if you're paying through a personal account, make sure you run that back through your business. Supplies, I think is one that often people will go out. Supplies are a meal. We'll talk about meals in a minute. But anything basically that you are paying out of a personal account, make sure that you turn around and run those through your business. It just makes the bookkeeping and the administration easier. Your bookkeeper can or your taxpayer can always go in and add those separately into your tax return adjusted. But for the cleanest audit trail, our goal here is to make tax prep a breeze, is to have all your business expenses in one place. So when your tax preparer goes in and he runs your P&L, everything is there. He's not going on trying to chase down other expenses you have. When you run it through your business, you have less likelihood that you're going to miss deductions.

Then, I want you to review your P&L by month. There is a report out on QBO that's exactly that says P&L by month. It's my favorite report. It's basically you can actually run it for the year. You can run it for the last 12 months. It's my favorite report because it allows you to see a trend. So I want you to run the report and here's a few things you can look for. Do you have any months that look to be missing expenses? So if you have an expense line and you have expenses for every month, 1 or 2 months. What happened in those months? Was that expense missing? Did it get paid out of a personal account? Is it maybe sitting in the wrong account? So make sure you're not missing any expenses. Look at any large amounts, look outside the normal trend. So if you have a month suddenly where expenses jumped to $10,000, go in and look at it. Make sure you understand what the expenses. This is also part of just understanding where your money is going. Look for anything that doesn't pass a sanity check. Look at the totals for the year. Look at the totals by month. Is there anything out there you're like, “Hey, I don't know what is this”, “I don't remember what this is”. If your bookkeeper is doing their job correctly, they should be identifying these as well with things. I'm often doing with my clients every month is anything that strikes me as out of the ordinary or unusual, I'm discussing with them, making sure it does happen. I've had clients that got charged, double charged for something. They got charged by it for something that they thought they had unsubscribed from. So again, this is just part of your bookkeepers due diligence, making sure that your financial statements are correct.

I also want you to look at your meals. You'll have a line on your P&L someplace, probably, that says your meals and entertainment, something similar. Under the tax code, most of your meals that you pay for are only 50% deductible. We can get into a whole discussion of tax policy, but it's really to keep people from going out and dropping $400 at Morton's Steakhouse and deducting the whole 100%. And the rationale is also whether you're eating out or not, you got to eat. So they're only going to let you deduct 50% of it. There is an exception. It's generally for company parties. There are a few other exceptions, but this is the primary one. If you have a business, and you own a company party, and you provide food at that party, you can't deduct that 100%. When your tax preparer goes in, the normal default is meals are deductible 50%. If you have any meals that are 100% deductible, I always advise clients, let's set up a separate account, on our chart of accounts that says meals 100%, and we would put anything that was 100% deductible into that account. Again, this makes tax prep super easy so that when your tax preparer goes in and he sees an account that says meals 100%, he may ask you some questions about it, but he knows that you've segregated out some meals that don't fall into the normal 50% lemonade deduction.

So that's what I want you to do with your P&L. There are other P&Ls you can go look at. I really like that P&L by month just because it’ll let you look at trends. So let's talk about some deductions that may not be in your accounting books. So let's talk about health insurance. If you file on a schedule C, and so this is going to be for all single member LLCs that are not filing as an S-Corp or people who don't have an LLC, you're just a sole proprietor. In certain cases, your premiums are deductible to you as an adjustment to income, your tax preparer wants to know the amount. So if you are paying for insurance, health insurance outside of your company, make sure you've got records of that'll probably come up in the organizer but it's definitely something to call out to your tax preparer, and a good tax preparer will definitely ask you about it. If you're an S-Corp, your premiums that are paid on behalf of an owner are actually included in your W-2 as income but the business takes a deduction for these. So if you are an S-Corp, basically your health deductions will run through your books but they get a little special treatment. But if you are filing your taxes as a sole proprietor, which is basically on your schedule C, then they will not be a part of your books.

Another one to look at is mileage. If you are driving your personal vehicle for business purposes, you can claim that as 65.5 cents per mile. Back in the day, just to date myself a little bit, back in the day when I did my taxes, I think it was 27.5 cents a mile, and that would have been in the 90s sometime but it adds up. I did a bunch of business travel earlier in the year, and I think in the space of a few weeks, I racked up $700 worth of additional tax deductions. QBO actually has an app for your phone that has a mileage tracker built into it, that's what I use. If you go out and Google mileage apps, you'll find other tools out there. You can use a spreadsheet, you can even have a little notebook. It's on your visor that you use, but you want to track the mileage for each trip and the business purpose. It’s important to track the business purpose. And what you can deduct is if you're doing travel specifically for business, so all my business is operated out of my home. So if I happen to have any in-person clients and clients local and I go visit those clients, that counts. If I'm going to networking meetings, that counts. So it's where I'm attending various events, functions in and around the area—and so that's where a lot of my mileage goes.

Likewise, if you have a business vehicle, so it's held by your business, it's in your business's books, it’s probably sitting on the balance sheet as an asset, and you use it for personal purposes, your tax pro is going to need that information as well. Actually your bookkeeper should because this is taxable to you on your W-2. So if I have a business vehicle, it's a part of my business, but I'm using it partially for personal purposes, I basically have to pay taxes on that as a taxable fringe benefit.

And then let's talk about everybody's favorite one, home office. In certain cases, yes, you can deduct a portion of your utilities, your mortgage interest expense or your rent expense as a deduction of your business. Please make sure when you do this, you talk to your tax preparer regarding a home office deduction. There are a number of rules around this and it can be an audit trigger. And the reason it can be an audit trigger is it's an area that historically gets a lot of abuse. Because one of the requirements for the home office deduction is generally that it needs to be used exclusively for business. So if you’re using, say your den, you use it as a business office but you also watch TV there, and your kid also does their homework there that doesn't qualify, so you want to understand the rules. I know people who once they understood the rules, they set up their house so that they could qualify. But if you want to deduct, a lot of people listening to this probably work primarily out of their home, it's definitely worth talking to your tax preparer about because you can realize some sizable tax benefits from that.

Next thing I want to talk about here is receipts. At tax season, those who don't have a bookkeeping system, this is the chase they go through. They start pulling all their receipts, trying to get them all organized. Pretty much no legit book or tax pro that I know now will allow you to just deposit a bag of receipts on their desk and figure it out themselves. You're going to pay out the ears for that.

When you have a bookkeeping system, I feel like the receipts, yes, you want to have a way to track them, but your tax pro may be asked for a few here and there. But it's really where receipts are coming in and where I see people chasing the receipts is when they don't have any type of system.

What you want to do for receipts is you just want to have a system to collect and access them easily. That last part is really important. There’s not one single best way to do it. I have ways I like to do it. Other people have ways they like to do it.

The thing is, if your tax pro asks you to produce a receipt or when receipts come in, even more to play is if you were ever to get audited, and the IRS comes in and asks for a receipt, you want to be able to easily access it. So there's a few different things you can do.

You can actually attach them into QBO. QBO app has a function where you can scan the receipt and attach it directly to an expense. You can scan it using your phone and then send it to yourself in email. I like to organize them in Google Drive or Dropbox. You can organize them by month. You could organize them by vendor.

Really ask yourself what is the most intuitive for you. If you have a bookkeeper, you or a VA, you can use them to help you keep your receipts organized. Work with them on a system that works for you. And again, I think the most important thing here is that it is intuitive for you. So that when you're asked to produce that receipt, you can find it.

There's a few places where I think receipts are more important than others. So for instance, being someone who works with clients mostly remotely, like I have zoom charges, I'm not worried about a zoom receipt. I can go into my zoom account and I can easily pull my billing history. I'm using Squarespace. Squarespace goes in. That's my website. That's where my website and domain are at, I can go into my dashboard there. I can easily access all of my billing history. And they go in and once a year and they automatically debit my account for the charges.

What I think you're really wanting to be documenting here are some of your more unusual expenses. Conferences, training that you're going to, things that are unusual. Anything where you pay with cash, obviously. If you happen to done anything where you're paying for cash, even think about your Uber receipts, you want to be able to access Uber receipts if you paid for a tip or you paid for something where you pay somebody in cash. You're trying to think of cases where you were paying cash. Probably tips at a hotel or something. Now, your bellman's not going to give you a tip, but you can write down on a piece of paper how much. Make a note of how much cash you gave him, the date, the time, and you can use that as a substitute. There are the minimum rules at the IRS around things that don't require a receipt. But again, anything I pay in cash, I want to keep some type of note for it, so I know what it's for because otherwise when you go into QuickBooks, it'll be hard to even remember what it's for.

Any type of business meal travel. These can get scrutinized both by your tax pro and in the event of an audit. The IRS might scrutinize these because what they're looking to do is making sure you're only deducting legitimate business expenses. Hotel receipts, meal receipts while you're traveling, you want to note that. When I get my receipt from the hotel, I make a note, what was the nature of the trip, what was I attending, what was my business purpose, why did I attend that particular event.

There are rules that if you're combining business and personal, certain portions of it are deductible and certain portions are not. So I keep a record of all that. Whenever I go out on a business meal, I'll keep the receipt and I'll make a note, who was I with and what we're discussing, because business meals are 50% deductible, but they have to be for business purposes. And again, if your tax pro the IRS ever comes back and they are like,”What are you doing with this dinner with Jane Doe and John Smith?” “What were you talking about?” You want to be able to say, Oh, we were talking about and be specific about the business purpose as opposed to, we were talking about the Super Bowl. So that's what you want to do with receipts.

Now, there may be some of you sitting out there and saying, well, I don't have a system. I have to go through my receipts. That's the only way to prep for tax season. So here's what I would do if you don't have a system. So first gather your documents, your bank statements, Stripe reports–Stripe is just an example, PayPal reports, and you want to create a spreadsheet. Like I said, I would never hand off and like I said, I don't think any tax preparer, let's put it this way, any tax preparer who will let you drop a box of receipts on their desk. You want to run and find a new tax preparer, because that's probably somebody you don't want to be working with. Most tax preparers, they're putting their name on the line when they sign your return. They're going to want something that's coming from you. So you're going to create a spreadsheet. You're going to use your business accounts, your business checking account statement. But if you’re paying expenses out of your personal account, yes, you're going to have to put your personal accounts, your personal bank statements, and you're going to have to go through and outline any business expenses. You can go and create your own spreadsheet but I do offer a tool. It's called Simple Financials. It is an easy to use, non-techy solution. It was specifically designed for those who do not have high volume, who don't mind doing some manual data entry, who don't want or need a full featured accounting system. It runs off of a Google sheet. When you purchase it, you get a Google sheet and you just copy it into your own drive. It contains a transaction register. That's the only place you have to enter any information. It kind of works like you're like your checkbook. You'll enter the date, who you paid, what the expense was for. But one of the things it does is it provides you dropdown categories. So you'll have little categories that are aligned with the schedule C of your tax return. So I've set it up so that you'll pick those categories and it makes preparing your tax returns super easy and then it has pre-populated reports. This is typically one of the things that's missing when you do your own spreadsheet is you don't have any type of reports that summarize anything by categories. So this has, I want to say 8 or 9 different reports last checked. But the key one is there is an annual profit loss detail that basically gives you your revenue and then all your expenses by all these categories. And you can basically shoot that off to your tax preparer and your tax preparer can use that to prepare his tax returns. If that's something you want to explore I'm going to drop the links for that in the show notes, it's $79. Pay for it once and then each year you can just duplicate it and use it again.

Hope this helped you and hope this helped you get prepared for tax season and make it smoother because again, it doesn't have to be stressful if we go into it prepared. If you are ready to outsource your bookkeeping in 2024 or you are ready to uplevel your existing bookkeeping, I would love to talk to you. I'm ready to offer expert accounting help, and we can have a further conversation by booking a call at www.carmoats.com/workwithme. And again, if you want a non-techy solution, you don't have a lot of volume, Simple Financials could be for you and I will also drop the link for that in the show notes. And I will see you next week.

Thanks so much for listening to the show. Remember that your finances deserve some love. Finance doesn't have to be complicated or overwhelming, and you do not have to do it alone. I'd love to talk to you about your business, so please come on over to www.carlamoats.com to learn more. Or if you're ready for financial and strategy support that will uplevel all your business, go to www.carmoats.com/workwithme to book your free financial assessment. And the last favor I'll ask is for you to help me get out the word. Tell your friends about this podcast and share it on your favorite social media. Until next week, go create some purposeful profit.