Tax preparation can become much more difficult when a business's financial records are incomplete, outdated or disorganized.

For a small business owner, tax preparation involves more than simply gathering a few receipts at the end of the year. Income, expenses, payroll, bank transactions, business assets and other financial information may all need to be reviewed.

Good bookkeeping helps organize this information throughout the year.

When your books are current and accurate, you have a clearer picture of your business finances and can provide your tax professional with the information needed to prepare the appropriate tax returns.

The relationship is straightforward:

Accurate Bookkeeping → Organized Financial Records → Better Tax Preparation

Bookkeeping is the process of recording and organizing a business's financial transactions.

Depending on the business, bookkeeping may include tracking:

• Sales and other income
• Business expenses
• Bank transactions
• Credit-card transactions
• Payroll
• Accounts receivable
• Accounts payable
• Business assets
• Loans and liabilities

These records provide the financial foundation for accounting and tax preparation.

The IRS emphasizes the importance of maintaining appropriate business records to support income, expenses and tax-return preparation.

One of the first things a business needs to understand is how much income it generated.

Bookkeeping can organize income from sources such as:

• Product sales
• Service revenue
• Online sales
• Consulting
• Contracts
• Other business activities

Accurate income records can help a business owner and tax professional determine the appropriate information to report.

Without organized records, it may be difficult to determine whether all business income has been properly recorded.

Businesses have expenses throughout the year.

These may include:

• Rent
• Utilities
• Advertising
• Insurance
• Software
• Professional services
• Office supplies
• Payroll
• Business travel
• Equipment
• Other operating expenses

Regular bookkeeping provides a system for recording these transactions.

The IRS explains that businesses generally need records that sufficiently establish income and expenses.

Business owners should maintain documentation supporting their transactions rather than relying on memory at tax time.

Tax deductions can reduce taxable income when the applicable requirements are met.

However, business owners cannot properly evaluate potential deductions if they do not know what they spent money on.

Organized bookkeeping can help identify expenses that may need to be reviewed by a tax professional.

Examples might include:

• Advertising
• Professional fees
• Business insurance
• Office expenses
• Employee wages
• Software
• Certain travel expenses
• Other qualifying business expenses

A bookkeeping record does not automatically make an expense deductible.

The tax treatment depends on the specific facts and applicable tax rules.

That is why bookkeeping and tax expertise work together.

Bank reconciliation compares the transactions recorded in your accounting system with the transactions shown by your bank.

Regular reconciliation can help identify:

• Missing transactions
• Duplicate transactions
• Incorrect entries
• Bank fees
• Unrecorded payments
• Unusual transactions

Finding these issues during the year is generally easier than discovering them immediately before a tax deadline.

Good bookkeeping provides information used to prepare financial reports.

Common reports include:

Profit and Loss Statement
Shows revenue, expenses and profit or loss for a specified period.

Balance Sheet
Shows assets, liabilities and equity at a particular point in time.

Cash Flow Information
Helps business owners understand how cash moves through the business.

These reports can help business owners understand financial performance and can provide useful information during tax preparation.

Imagine trying to reconstruct twelve months of transactions a few weeks before the tax deadline.

You may have:

• Hundreds of bank transactions
• Credit-card purchases
• Missing receipts
• Unorganized invoices
• Payroll records
• Equipment purchases
• Contractor payments
• Other financial documents

This can turn tax preparation into a time-consuming cleanup project.

Regular bookkeeping spreads the work throughout the year.

Instead of asking:

"What happened with my business finances last year?"

you can review current financial information throughout the year.

There is no single schedule that works for every business.

Some businesses may benefit from:

Weekly bookkeeping
when they have a high volume of transactions.

Monthly bookkeeping
for many small businesses with moderate transaction volume.

More frequent bookkeeping
may be appropriate for businesses with significant transaction activity or complex financial operations.

The important point is consistency.

Books that are updated regularly are generally more useful for financial management and tax planning than records that are only updated once a year.

These services are related but serve different purposes.

Bookkeeping
Records and organizes financial transactions.

Accounting
Analyzes, classifies and reports financial information.

Tax Preparation
Uses relevant financial and tax information to prepare applicable tax returns.

A simple way to understand the relationship is:

Bookkeeping → Accounting → Tax Planning → Tax Preparation → Tax Filing

Not every business needs the same level of service, but maintaining accurate financial records is an important starting point.

Small businesses often have financial transactions throughout the year that need to be organized before tax preparation.

These can include:

• Business income
• Business expenses
• Payroll
• Contractor payments
• Equipment
• Bank transactions
• Credit-card transactions
• Loans
• Owner transactions

Good bookkeeping helps organize these records before they reach the tax preparation stage.

The records a business should maintain depend on its activities.
Common records include:

The IRS provides recordkeeping guidance for businesses, including information about documents that may support income and expenses.

Before giving your financial records to your tax professional, review:

The IRS provides recordkeeping guidance for businesses, including information about documents that may support income and expenses.

Mixing Business and Personal Transactions
Combining personal and business transactions can make financial records more difficult to review.

Falling Behind
Waiting months to update the books increases the likelihood of missing information.

Not Reconciling Bank Accounts
Unreconciled accounts can contain errors or missing transactions.

Losing Receipts
Without supporting documentation, it can be more difficult to establish the nature of an expense.

Misclassifying Expenses
Transactions should be categorized appropriately in the accounting system.

Ignoring Small Errors
Small bookkeeping errors can accumulate over time.

Waiting Until Tax Season
Trying to fix an entire year's bookkeeping immediately before tax preparation can create unnecessary stress.

Professional bookkeeping may be worth considering when:

• Your books are consistently behind
• You have many transactions
• Bank accounts are not reconciled
• You have employees
• Your business is growing
• You have multiple accounts
• You are preparing for tax filing
• You need financial reports
• You are spending too much time on bookkeeping

The goal isn't simply to outsource a task.

Good bookkeeping should give the business owner better financial information and a more organized foundation for tax and business decisions.

Sharma Davis Madan & Co. (SDM CPAs) provides accounting, bookkeeping and tax services for individuals and businesses.

Depending on the client's needs, services may include:

• Bookkeeping
• Accounting
• Tax preparation
• Tax planning
• Tax consulting
• Payroll
• Financial advisory
• Business advisory

Coordinating bookkeeping and tax services can help businesses maintain continuity between their financial records and tax preparation.

Contact us