Informative Behind the Scenes Look at Getting Tax Ready

Prospective clients quickly figure out that what makes the ADI Team different stems from my experience working in public accounting as a staff accountant specializing in business and individual tax returns. During my seven years working in public accounting, I had the opportunity to work with three different firms with three different prep requirements. However, all of them had a similar need and purpose around why tax work papers were created. So in this first installment of “Ask Connie” I am going to share what tax ready work papers are, and why you should require your bookkeeper to provide them for you.

Who needs tax ready work papers?

In our opinion, every business needs them. Our team treats all business entities the same, regardless if you are an S-Corporation or a single member LLC. We feel that a complete set of accounting records is the final work product that our firm is responsible for. However, for tax purposes, a single member LLC won’t need a balance sheet compared to the tax needs of a corporation. Which is why your tax professional, who is focused on your business tax needs, may have different requirements based on your entity as well.

It doesn’t take much effort to have your accounting tool properly set-up with a finance ready Balance Sheet. Ask your tax professional or hire a consultant to help set-up and optimize your accounting tool. If you are going to be a profitable business, then choose to have your accounting reflect that as well.

Why are tax ready work papers even important?

I wrote a post about the importance of reconciling your bank accounts that you can read HERE. In fact, reconciling your bank accounts is the first step in creating tax ready work papers. The importance of reconciling your bank account is to prove that your accounting tool has captured all of the activity that flowed through your account. Things happen, like:

  • Technology – love it or hate it, sometimes it doesn’t work perfectly; so verify it
  • Manual data entry – some of us have fat fingers or are not, that detail oriented; if you are manually entering your activity you need to make sure it’s right on the mark
  • PayPal – we give PayPal it’s own category because, majority of the bank issues we find relate back to how PayPal is being recorded which more than not, results in double recorded income and can short expenses

So when we apply that same philosophy to ALL of your Balance Sheet accounts, it means that we are taking the time to prove to you; to your tax professional; and in case of audit, Uncle Sam; that we know what is “in” or represents the balance indicated. It is not just a recap of the activity from your accounting tool. It will be copies of invoices for equipment purchased. It will be statements for loans or amortization schedules. It will be a list of your payroll liabilities and when they were paid the following year. As far as I’m concerned, your tax return should not be processed until you are able to see and verify your accounting data and tax work papers allows our team to communicate that TO you and FOR you.

What qualifies as tax ready work papers?

As mentioned, it is more than just a listing of what comes straight from your accounting tool. Here is an example of what our team provides for our clients:

Bank statements that show your balance as of 12/31 PLUS reconciliations – checking, savings, credit cards, loans, etc. However, your Balance Sheet may not be the same balance as what the bank had because checks were issued but not cashed; payments made to credit cards but not posted, etc. So not only are we proving what the bank shows we also document why the accounting tool shows something different.

Detail activity listing of accounts – these are clearing or holding accounts like prepaid rent, client deposits, gift certificates, employee advances. Example, an employee is advanced some funds and it is recorded to this Balance Sheet account as a placeholder that you can track. Eventually the employee pays it back, and when that happens it is recorded against the draw which then zero’s out the activity in the account. A proper work paper for this account would then be nothing if there was no outstanding draws still waiting to be paid back. The easy work paper is to print off what is in your accounting tool, but it doesn’t quickly document WHY there is a current balance as of 12/31. An excellent work paper would show only the activity still owed, date/who/amount of the original transaction and documentation about when it will be resolved.

Fixed Assets – one of the best work papers is a copy of your actual purchase receipt. It has everything on it that your tax professional will need to evaluate if it needs to depreciated.

Charitable Donations – gather the document BEFORE your tax professional asks, they are going to want to see your actual receipt for anything over $250.

Payroll – Copies of your quarterly and annual reports. Extra credit for adding a recap that pulls and double checks those reports to your accounting data.

Tax Entity Specific Items – Know your tax entity needs, for example if you file Form 1065 Partnership then you need to break out guaranteed payments and benefits by partner, which also can include auto.

Auto – At the very least your tax professional will need starting and ending mileage on your car. Plus they will need to know how much of that mileage during the year was business related vs. personal. Right now I see 95% of the businesses using mileage as their tax deduction, but if you pay for your actual auto expenses through your business then you’ll have that info ready when and if it is a better tax deduction for you.

Health Insurance – you may qualify for a tax credit and your tax professional will need the insurance broken out by employee that was paid in the tax year OR clearly identify how much your own personal insurance is.

Home Based Businesses – if you are a home based business then your tax professional will need all the info on your home office expenses like rent/mortgage, utilities, repairs, square footage, improvements, etc.

Other Tax Related Returns – provide a copy of the following returns

  • 1099s you filed for your vendors
  • Personal Property Tax returns (due in Oregon 3/15)
  • 1099s you received from your bank, merchant provider or client
  • Letters from any tax agencies

Balance Sheet – use the reports as your cover sheet for the work papers created, even add notes as needed. We provide Balance Sheet that shows prior year as well so it makes it easy for the tax professional to make sure activity hasn’t changed since they last processed your tax activity.

Profit & Loss Statement – your cover sheet for the work papers listed above. While your tax professional will only care about the current tax year, I like to print this report showing the prior year compared to the current tax year. I use it to review for activity that might have been missed, like home office deduction or auto mileage. This is also WHY we match our clients accounting tool back to their tax returns, it helps us track and identify activity the tax professional will need.

Next steps

Now that we have outlined all you need to know about tax ready work papers, you can guide your bookkeeper on what you need. Or ask your tax professional for advice on what they need from you and your team that communicates your accounting is dialed in, double checked, and ready for tax processing. For our clients, the extra care we put into the work papers has:

  • Saved them money in tax processing fees – it is way more expensive to have your tax professional do bookkeeping, than your bookkeeper;
  • Had a tax professional take a client back because they already knew the quality of work we would provide; and
  • Was able to provide the activity late in the season because the tax professional didn’t have to do the prep part and they could easily identify and process for the business return.

January is all about pulling your business activity together. IRS re-opened electronic filing on 1/11/2016 for payroll reports, so this week your bookkeeper and payroll teams will be busy finalizing those reports. 1099s will be issued throughout the month, but you may not receive them until the end or first part of February. The first step is to have patience, it takes a little time to get all the activity pulled together. You can also check-in with your tax professional on how best to provide what they need for tax processing – do they want photocopies or will scans work? Do they want access to your accounting tool, or just reports?

FINAL ADI PROTIP: no need to keep them in paper form after you have pulled everything together. Go ahead and create a scan of the documents and save them electronically. In fact this is exactly what our team does for ourselves and all of our clients.



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