The IRS Cometh: Best Practices for Closing the 2012 Tax Season
Accurately closing your 2012 fiscal books helps take the pain and frustration out of tax season.
Business and Personal Spending
Small businesses, especially those run by a single person, can get a little lax with their accounting systems. Business and personal expenses can intertwine, adding to the confusion. Does the new laptop you bought for work count as a business expense if the kids game on it? Does your Costco card count as a work expense if you buy groceries as well as office supplies?
Keep business and personal expenses separate, using different accounts for each. Otherwise, you're going to have unnecessary headaches at the end of the year.
Home businesses probably won't have separate utility bills for the business office and the rest of the house. Remember you can claim a portion of electricity, heat and mortgage payments as business expenses, so account for these expenses when closing the books.
Some small businesses take the "shoebox" approach to taxes, shoving any business-related paperwork and receipts into a single box and dropping the mess on an accountant's lap come tax time.
Accounting software makes life easier for both you and your accountant. Programs such as Intuit's QuickBooks allow you to input expenses, invoices and income on a daily basis, and automate many of the calculations needed for closing the books.
Closing the yearly books is similar to managing your monthly accounts. You need to reconcile bank and credit card statements, take inventory, pay taxes, calculate payroll and transfer uncategorized income and expenses to the general ledger.
Closing each month's books carefully and consistently makes closing the fiscal year much easier, as most of the calculations are already completed. You can work with the end-of-month balances instead of starting from scratch.
End-of-year financial housekeeping should include a thorough inventory check. Taking inventory isnt exactly a thrill-a-minute activity, and seems even worse in the dead of winter, but it's important to get an accurate accounting of stock before closing the books.
Determine how much stock has been lost, stolen or damaged and reconcile this with the value of your inventory assets. While youre at it, calculate the depreciated value of any fixed assets and adjust the general ledger accordingly.
End of Year Expenditures and Income
You may want to decrease income and increase spending at the end of the fiscal year. Any profits or invoices you can put off until January will decrease your income for the current tax year.
Similarly, increase your expenditures in December if possible. Paying January's bills early, stocking up on office supplies and making larger fixed asset purchases at this time reduce your upcoming tax bill.
A business should back up all datafinancial or otherwiseon a regular basis. After you close the yearly books, create a backup and store it in the cloud or in a secure location away from the office.
A hard drive crash or similar disaster could wipe out a year's financial documents, information that the IRS will still expect you to produce.