Tax prep 101: 5 reasons why planning now can prevent a big bite later

When we are children, our parents teach us to avoid the use of foul language, specifically the so-called four-letter words. As adults, we realize that the foulest word actually consists of five letters—taxes. And, regrettably, there is no avoiding that word. However, planning now for the current financial year can help to reduce your company’s liability when taxes are due.

Most of you are probably in the midst of prepping for your annual tax meeting or procrastinating for a little longer. In either case, some accounting expertise is in order. Why not take advantage of some pointers on how to make this annual exercise a little less painful, and a lot more profitable, for your company?

Jim Daufeldt, a certified public accountant based in Greensboro, N.C., is owner and principal of his own consulting practice. His career includes positions as senior financial analyst for large publicly traded firms such as Hewlett Packard, and most recently he served as chief financial officer for a privately held manufacturing company in which he managed the sale of the 30-year-old family business. Here are some pointers from Daufeldt based on years of experience helping companies prep for annual tax meetings.

1. What are the chief two or three tasks business owners should complete before meeting with their accountant for taxes?

Most important is a full-year/year-end financial statement with line-item detail. A tax accountant also will need to review the complete closing general ledger for the full year and the reconciled monthly bank statements. Ideally, this information should be provided electronically.

2. Which job functions in the business should participate in tax planning and review meetings?

The size of the organization determines the specific partners and their titles in this endeavor. At a minimum, the three key participants are the owner/CEO, the CFO, and the controller or bookkeeper.

3. What common mistakes do you see business owners make during tax prep?

Organization and knowledge are key points here. The most common mistake is not having all of the tax documentation together when the meeting with the tax accountants first occurs. This automatically causes delays and requires additional staff time and expense to gather the missing documents. Another mistake is owners not understanding the tax laws well enough and not asking the tax accountant during the year for advice on those laws relative to the activity of the business operations. This might include capital expenditure recapture as well as Sub S rules.

4. How often should owners participate in tax planning meetings with internal staff and outside firms?

Tax planning actually starts in the prior year, when the capital expenditures budget is being prepared. Thereafter, internal meetings should occur quarterly and meetings with external tax accountants should occur semi-annually. The quarterly meetings keep the owner and other internal staff apprised of ongoing activity throughout the year, while the mid-year review with the external group allows adjustments to be made based on their recommendations. Then just before year-end, a second review with the external group will allow adjustments to be made again based on a more complete scenario of the business activity for the year.

5. Which financial reports do you recommend for regular review to manage the business year-round?

Most important are the usual standard monthly reports such as the balance sheet and income statement, both of which should be compared against budget for the month as well as year to date with variance explanations provided. In addition, I recommend reviewing the monthly bank account reconciliations, as well as weekly and monthly sales reports and payroll registry, an aged receivables report, and a quarterly capital allocations report tracked against budget. If time and staff permit, I recommend a quarterly management review slide presentation that could include most of the aforementioned reports, a couple charts and graphs that depict the business activity visually, and a few others that might be pertinent and timely.

These are some basic pointers for Tax Prep 101. The very first step is vetting and hiring a reputable accounting firm to support your business. The right partner makes all the difference. If you have a gap in this area, reach out to a consultant for guidance.

Ben Franklin is known to have said, “An investment in knowledge pays the best interest.” Perhaps second best is an investment in a knowledgeable accounting consultant’s expertise.