What do the words “tax return” bring to mind? For many people, fear, dread, disgust and overall dislike are the first thoughts. Accompany these feelings with the average person’s innate inclination of procrastination, and filing taxes is a recipe for a “tax nightmare.” Let me give you an example.
Abby (not her real name) utilizes the quarterly payment exemption available to farmers – and therefore has a March 1 filing deadline. Abby’s response to my January phone call reminding her of the tax return deadline went something like this: “Is it that time again already?
I haven’t even started pulling my information together. We’ve started calving, and I just don’t have any time right now.”
As we neared the deadline, my calls to Abby became more frequent. Finally, the last week of February, Abby brought in her “accounting” which consisted of a few hand-scribbled notes about income and expense items along with a few receipts and bank statements.
After many late-night hours, we were able to pull together a reasonable accounting of her year’s activity. The end result was a significant amount of income, to which Abby responded, “There is no way I made that much.” Following an in-depth review of the accounting with Abby, she finally agreed that the numbers looked correct.
Ultimately, Abby’s return was filed on time with the appropriate taxes being paid. However, neither myself, my staff, nor Abby enjoyed the process.
What could have been done to avoid this nightmare?
After the deadline, Abby and I discussed our experiences of that year’s preparations for tax filing. I offered her my advice on how we could improve the process, relieve some of the stress and reduce her fees in the process. Here are a number of the things Abby and I discussed:
1. Use accounting software. I recommend consulting with your accountant to choose a software package that you can become comfortable using. A software package purchased but not used provides no benefit. I recommend choosing a package that will prepare both an income statement and a balance sheet for your company.
These reports help provide assurance that all items have been accounted for. It was my review of the balance sheet, along with the income statement, that helped Abby conclude that the reported income was correct.
Consult with your accountant on what accounts should be set up and used. While the software can provide reports to aid your accountant in the return preparation process, it is equally important that it provide reports to assist you in operating your business. The reports should be meaningful and provide you with key data to assist in your decision-making process.
Keep the number of accounts to a minimum. Having extra accounts that are not meaningful can create confusion. I highly recommend an “Ask my Accountant” account. Too often I hear, “I got stuck because I didn’t know what to do with this item, so I just stopped.”
Instead of getting stuck and stopping, just code the unknown item to “Ask my Accountant,” then follow up with your accountant on any items in that account when you have finished.
2. Record your information often; I recommend monthly. Nothing seems to set off the dread of “that time of year” worse than not having any accounting done when tax season comes. The task of gathering a year’s worth of information can be extremely daunting. Done frequently, however, this task becomes less burdensome. I recommended Abby select one day a month she could devote to recording her monthly information into her accounting software.
Abby chose a day that corresponded to when her monthly bank statements arrived. On this day, Abby records all checks written in the past month, then reconciles her checking with her bank statements. She also records any credit card purchases from receipts, then reconciles those charges with her credit card statement.
3. Keep track of checks and receipts. Be sure to use the memo field detailing what the check is for, and record that information in your check register. While Abby did have bank copies of her checks, she had not included any information on the memo fields.
For example, with many checks written to the local farm supply store, we had no idea what those checks were specifically for.
Keep all receipts, no matter how small. Ideally, receipts would be kept with check copies or the associated credit card statements appropriately filed. While this may be possible for large operations, even required if operating with a full accounting staff, for most owner-operators this is just not feasible.
For these clients, such as Abby, I recommend keeping a box in a safe location and, at the end of every day, place all receipts from the day in the box. The box can then be referenced as needed for detail or in support of expenditures.
4. Maintain separate accounts for business and personal use. For many small owner-operators, intermingling of personal and business accounts occurs all too frequently. I tell many of my clients, “If you get to the store and have the wrong checkbook, don’t use it.
Go home and get the right one. Don’t use your personal account for the business, and don’t use the business account for personal items.” Recently, I have updated my advice to include the use of credit cards. If you are using credit cards for your business, don’t use the same card that you use personally.
Get a separate credit card for the business, and just like the checkbook, “Don’t use your personal account for the business, and don’t use the business account for personal items.”
5. Set aside time to gather additional year-end items. While monthly tracking will take away most of the year-end hassle, there will still be a few year-end items that need to be considered.
One such item is a reconciliation of loan balances. Gathering loan information, including year-end balances and interest paid during the year, will help your accountant reconcile these accounts and ensure that all loan payments have been accounted for appropriately.
6. Meet with your accountant at the end of the year. Meeting with your accountant prior to year-end can help avoid surprises like Abby had. This meeting provides an opportunity for your accountant to complete a preliminary review of your monthly work up to that time and allows him or her to give you year-end tax advice and planning opportunities.
In addition to a year-end meeting, I also recommend you consult with your accountant prior to entering into any major transactions, such as real estate transactions. This will allow your accountant to advise you on immediate and long-term tax implications of these transactions.
7. When in doubt, ask. My final recommendation to Abby was to be sure to call and ask for help when she has questions.
At the time of this writing, Abby has committed to follow through on many of my recommendations. She is currently going through an up-front learning curve on how to track her information monthly in her chosen software and does have frustrations.
But I have assured her that if she stays committed, next year’s tax season won’t be the recurring nightmare it has been in the past. 
Campbell is a tax partner with Jones Simkins LLC, an accounting firm with offices in Logan and Salt Lake City, Utah, and an adjunct professor at Utah State University.
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Paul Campbell
- CPA
- Jones Simkins
- Email Paul Campbell
