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Getting ready to finalize your tax return?
Before you call it done, double-check these five things to make sure your return is really ready to be filed.
#1. Are all bank and credit card accounts reconciled?
First things first: what does it mean to reconcile accounts? Simply put, when you reconcile accounts, you confirm that the amounts shown in your accounting software match what is shown on your bank and credit card statements.
While accounting software is designed to make our lives easier—and usually it does—there is the occasional glitch where something gets accounted for twice, or perhaps not at all. Reconciling accounts will allow you to catch any discrepancies like this.
In QuickBooks, if everything is properly accounted for, the difference on your reconciliation will show zero—it doesn’t get much simpler than that. This handy QuickBooks guide will help you reconcile a bank or credit card account.
#2. Is payroll grossed up to match what is being reported on the W-2s?
Pop Quiz: What payroll processor are you using? Is it QuickBooks Online Payroll? Or is it a software that can easily be integrated with QuickBooks Online?
If you aren’t using a payroll software that integrates with your QuickBooks Online account, then payroll amounts are likely being recorded at net.
Gusto does a nice job explaining the difference between net and gross pay:
Gross pay is the amount of money your employees receive before any taxes and deductions are taken out. For example, when you tell an employee, “I’ll pay you $50,000 a year,” it means you will pay them $50,000 in gross wages.
Net pay is the amount of money your employees take home after all deductions have been taken out. This is the money they actually get on payday.
What does this mean for you? If payroll amounts are being recorded at net, you will need to gross up the payroll (e.g. increase the net amount to include deductions, such as taxes) to match what is being filed with the IRS.
What should you be reporting? You should only be reporting company paid taxes on the profit and loss (P&L) statement. Any taxes withheld from the employee's paycheck will be accounted for on the balance sheet as a liability.
#3. Are all liability accounts (loan balances & payroll liabilities) tied out?
Do your liability accounts on your balance sheet match what is truly owed, whether that be to the bank, an individual loan, or payroll liabilities? Before finalizing your tax return, make sure these amounts match true ending balances.
Look at your loan statement—if the ending balance matches what is shown on your balance sheet, you're all set. If it doesn't, it's usually a matter of splitting out interest from principal payments.
Payroll liabilities, on the other hand, are a little less cut and dry. Payroll liabilities are any type of payroll-related payment that a business owes but has not yet paid (for example, wages an employee has earned but not yet received, retirement and insurance benefit deductions, and taxes withheld from employees).
If a negative number is shown under payroll liabilities category on your balance sheet, that should tip you off that, most likely, the original liability is sitting on the P&L statement and needs to be recategorized as a payroll liability. We most often find these incorrectly categorized as payroll tax expenses—the payroll tax expense category should only reflect the company portion, not expenses from individual employees. As mentioned above, any taxes withheld from an employee's paycheck should be accounted for on the balance sheet as a liability.
#4. Are there items sitting in uncategorized expenses on the P&L statement, or uncategorized assets sitting on the balance sheet?
All expenses should have a home on the P&L statement. You know those items you have categorized as “Ask My Accountant” or, oxymoronically, as “Uncategorized”? They need to be recategorized to an appropriate account. As a general rule of thumb, you should avoid using vague categorization whenever possible.
If you're unsure of where an expense should go or if it’s truly a business deduction, ask your CPA. Don't have a CPA? Reach out to a colleague for their opinion on where it should be categorized, or consult everyone's best friend: Google.
QuickBooks will help you categorize expenses however, some items slip through the cracks and are labeled as uncategorized assets—periodically double-check your balance sheet to make sure nothing is sitting in that account.
#5. Can you be more strategic about your furniture and fixtures account?
What is your company's policy on expensing versus depreciating an item? Is there a set threshold? As a general rule, it's better to expense an item than to depreciate it because money has a time value.
When you expense an item, you get the deduction in the current tax year; if you depreciate the item instead, it may take several years before you receive the full tax benefit.
The IRS sets its own threshold for what expenses can be expensed and what expenses must be depreciated. As per the IRS:
“Effective for taxable years beginning on or after January 1, 2016 the Internal Revenue Service in Notice 2015-82 increased the de minimis safe harbor threshold from $500 to $2500 per invoice or item for taxpayers without applicable financial statements. In addition, the IRS will provide audit protection to eligible business by not challenging the use of the $2500 threshold for tax years ending before January 1, 2016 if the taxpayer otherwise satisfies the requirements of Treasury Regulation § 1.263(a)-1(f)(1)(ii).”
Allow us to translate for you: you don't need to capitalize that $500 office chair you splurged on.
Double-check to see if any new items are hitting your furniture and fixtures account. Can you bring them over to the P&L statement and expense them immediately instead of depreciating them over time (i.e. are they under that $2,500 threshold)? If yes, do so. If not, make sure to include them in your tax return on the depreciation schedule.
Once you've double-checked the five things above, it's time to finalize your tax return!
Want to wash your hands of bookkeeping altogether so you can focus on what you love? Connect with the Bean Team—bookkeeping is what we love most (and we're pretty darn good at it too).