Getting Information Ready for Tax Accountants Part I: Small Businesses

January again! The busiest time of year for many accountants and bookkeepers. There’s the general ledger to reconcile and close out, financial statements to produce, 1099 forms and payroll filings to complete, and personal property tax returns to file. But wait! There’s another task to consider…the income tax return.

Fortunately, the CPA prepares the income tax return for you, but they need your help. There are several strategies you can employ to make your working relationship a successful and productive one.

First Steps

For starters, double-check your accounting software to ensure you’ve posted your CPA’s journal entries for last year (2012). Your CPA may have included these entries in the same packet with the 2012 tax return. If the person who signed the 2012 tax return didn’t pass on any journal entries, check in with your CPA to find out if there were any. If so, be sure to post them to your general ledger as of December 31, 2012 (for calendar year entities).

If the business experienced changes in ownership, or any other type of significant transaction during the past year, gather the relevant legal documents (buy-sell agreements, promissory notes, etc.) and forward copies to you CPA. These documents will provide specific information about the transaction that will help your CPA report it properly on the tax return.

The “PBC List”

Many CPAs send out a document that includes a list of the information they typically need each year to prepare your company’s income tax return.  These documents are commonly called Prepared by Client Lists, or “PBC Lists”. If you have questions about some of the items on the PBC List, don’t hesitate to contact your CPA and ask them what they’re expecting. If some of the items on the PBC List won’t be available for a while, ask your CPA if they’d like you to send the information you’ve gathered so far. You can forward outstanding items once they become available.

Standard items accountants almost always need

If you don’t have a PBC list, feel free to request one. Even without a PBC list you can accomplish a lot by addressing these common items:

  1. 1) Ensure that your books are complete for the tax year: complete the December reconciliations for all cash, credit card and loan accounts; make sure all reimbursable expenses have been submitted by employees and recorded in the company’s books; review the year-end balance sheet and profit & loss statement for erroneous amounts or unusual items.
  2. 2) Once you’re comfortable with the balance sheet and profit & loss statements, export a copy of the company’s trial balance from your general ledger software. We recommend that the file be exported in excel.  Many CPAs prefer to receive the trial balance in this format for ease of import into their firm’s trial balance software. Or, if your business uses Quickbooks, create a “portable file” which backs up the data in a condensed format that can make transferring the file to your CPA simpler.
  3. 3) Collect copies of the company’s year-end bank statements and bank reconciliations for each checking and savings account.
  4. 4) Gather copies of the company’s year-end bank line or credit, bank loan and credit card statements. Since some loan and credit card statement periods cross over month ends, be sure to collect the statements with coverage periods that include the last day of the business’s tax year.
  5. 5) If the business has fixed assets, prepare a list of asset additions that includes a description of each asset, its in-service date and cost. If any assets were retired or sold during the year, prepare a list of each disposed asset that includes the same elements as the asset additions list and also includes the amount of proceeds received from sale of the asset, if any. You could also request a copy of the fixed asset list from your accountant; use that listing to identify disposed assets and the related sales proceeds.
  6. 6) If the business has a retirement plan, contact your plan administrator and ask what information they’ll need from you in order to calculate the required amount of the employer contribution to the plan in accordance with management’s intent and plan requirements.
  7. 7) Prepare a schedule of officers’ compensation showing each officer’s Medicare wages. If the business has a calendar year-end, you can take the amount from box 5 of the W-2 (or simply provide copies of the officers’ W-2s).
  8. 8) If the entity is an S corporation or a partnership, prepare a schedule listing the medical and dental insurance premiums paid on behalf of each owner.
  9. 9) Review any account where you have recorded meals and entertainment expenses. Be sure that these accounts don’t include the expense of any company parties, or meals served on-site to permit employees to meet or work beyond their normal workday.  (Those types of expenses may not be subject to the same tax limitations as business lunches at restaurants, or golf or sporting events with a client.) If you have any questions about the tax treatment of any items in your meals or entertainment accounts, ask first – it will save time in tax preparation, and may save tax dollars, too.
  10. 10) Sign the tax engagement letter, or locate the letter and have the business owner sign it. This agreement describes the terms of the arrangement between the business entity and the accounting firm for the preparation of the return. These letters are often mailed in January, so check with your employer to find out whether they have already signed and returned the letter; if they haven’t returned it yet, you can remind them to do so.

Why do they keep asking me questions?

After you’ve provided this information and whatever else was requested on the PBC List, your CPA will probably contact you with some follow-up questions and requests. This is normal! Your CPA wants to understand your business thoroughly, and help you take advantage of all allowable deductions and tax accounting methods. (Also, we like to talk to you!)

Happily, once you’ve submitted everything to your accountant, you’re likely nearly done – until next year!

Have a question about our post? Don’t be shy! We welcome you to contact us at any time.

Author: Chalayane Woodke, CPA 

This blog post is a summary and is not intended as tax or legal advice. You should consult with your tax advisor to obtain specific advice with respect to your fact pattern. Based on the most recent “best practice” standards for tax advisors issued by the Treasury Department, commonly referred to as Circular 230, we wish to advise you that this blog post has not been prepared to be used, and cannot be used, to provide assurance that penalties which may be assessed by the IRS or other taxing authority (including specifically section 6662 understatement penalties) will not be upheld.

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