Are preventable bookkeeping mistakes resulting in large tax preparation fees for your business? Are you puzzled as to why your CPA or tax preparer has to make so many corrections to your accounting data? Below are the top five bookkeeping mistakes you need to be aware of as a small business owner, along with important tips on how to correct these mistakes.
Failure to Gross Up Wages
One of the most common adjustments that your CPA or tax preparer will likely make, aside from posting depreciation, is what we call “grossing up” the payroll. I know, it sounds a little weird, but it simply means that we adjust the total amount of wage expense on your books to match the gross wages on Form 940 and/or Form W-3. This adjustment is crucial, as a discrepancy between the W-3 and the annual business tax return could flag the attention of the IRS.
The problem is that most business owners and bookkeepers fail to post payroll correctly, which leaves a lot of work for their CPA or tax preparer at year-end. The commonly used shortcut of only posting net paychecks and payroll tax payments may save you input time, but if you spent just a few more minutes each time you input payroll, you could keep your books more accurate and reduce your tax preparation fees. Ask your CPA or tax preparer to create a standard entry for you, or have your payroll processor setup their general ledger interface service for you so that payroll data can be automatically imported into your accounting software.
Hiding Fixed Asset Purchases
As much as we enjoy a challenging puzzle, we prefer not to have to go searching for your fixed asset purchases in your profit and loss transaction detail. Some bookkeepers have become lazy about this in recent years because of bonus depreciation and high Section 179 depreciation limits, but regardless of the current depreciation rules, it is still important that fixed assets be properly recorded.
If you want to keep your tax prep fee low, post all capital expenditures over $200 – $500 (or more if you have a larger business) that will last longer than a year to a fixed asset account on your balance sheet. If you are not sure if a specific purchase qualifies, post it to the account anyway. Your CPA or tax preparer can always reclassify the cost if it is immaterial. Also, keep a file of supporting documentation, invoices, or receipts for all fixed asset purchases made during the year, as this makes tax preparation much easier.
Not Reconciling Balance Sheet Accounts
If you are simply inputting transactions and not at least reconciling the bank and credit card accounts, your accounting records cannot be relied upon for accuracy and you are leaving a lot of work for your CPA or tax preparer.
The reconciliation process catches duplicate entries, input errors, stale checks that need to be voided, and missing transactions. More importantly, the transactions are being tied out to a third party document, so your CPA or tax preparer can briefly review the reconciliation and the bank statement and reasonably accept the balance. Most accounting software packages have greatly simplified the reconciliation process, so you should not have an excuse for failing to reconcile all your bank and credit card accounts.
If you are a more experienced accountant and want to further reduce your tax prep fees, talk with your CPA or tax preparer and find out what other balance sheets should be reconciled each quarter or at year-end. For example, loan accounts can be reconciled to statements or amortization schedules, payroll liability accounts can be tied to payroll tax reports, and prepaid insurance accounts can be tied to billing statements.
Date Entry Errors in A/R and A/P at Year-End
QuickBooks and Peachtree have great report customization features that allow you to change a report from cash to accrual basis with one click; however, it will only work correctly if the transaction dates are input correctly. There is nothing worse than finding negative accounts receivable or payable balances on a cash basis balance sheet, and one of the most common culprits is a date entry error. If you date a payment before an invoice or a bill payment before the bill it is applied to, you are going to leave your CPA or tax preparer with some frustrating errors to correct.
The worst part is that A/R and A/P transactions take more work to correct in QuickBooks and Peachtree since customer or vendor names have to be used and multiple accounts cannot be adjusted in the same transaction. Even worse, reviewing the transaction history can be time consuming, and sometimes it can be a tangled mess to make sense of. Make sure you are reviewing your A/R and A/P Aging reports on a regular basis and investigating anything that does not look correct. A little extra work each month can save your CPA or tax preparer a lot of work at year-end and lower your tax prep bill.
Changing Prior Year Data
This is probably the greatest sin a bookkeeper can make, and unfortunately it happens far too often in small businesses. In fact, the first procedure we perform when starting the accounting work for a tax return is to look at retained earnings on the comparative balance sheet and make sure it matches the amount reported on the prior year tax return. If it does not match, it is outright frustrating for us, as we cleaned the books up last year and even sent the exported changes back, but somehow prior year transactions were changed, and now we have to find out what happen.
My recommendation is to password protect and close out the prior year after your tax return is completed and you have received the exported changes back from your CPA or tax preparer. At that point, the numbers are being reported to the IRS, so it is critical that the transactions not be changed. Unfortunately, in QuickBooks it is not always obvious that a transaction will affect the prior reported year, so the password protection works as a great reminder when inputting transactions during the following year. Plus, it protects against prior year changes caused by date entry errors.