As you head back to work this week, my guess is that taxes and tax planning aren’t on your mind just yet. Tax deadlines seem so far off, and your immediate concern is getting the wheels of your business in motion again after the holiday lull. (Plus, taxes are only exciting if you’re an accountant. We get it.) But as we swing into the new year, I want to encourage you to make (and keep!) your first business resolution: to finish off your 2016 entries by entering all expenses and financial transactions into your ledger, accounting software, or whatever system you use. Yes, do it now.
Let’s face it: Your memory will fail you. All of that planning we encouraged you to do at year-end? Even if you followed it all, you likely won’t remember exactly what you did come tax time. And your financial and bank statements? They will fail you, too. It’s true. Financial and bank statements will evidence your transactions when they are recorded or cleared, not when you made or initiated them. That means that the check that you wrote at the very end of December (2016) may not show up on your bank statement until January (2017). It’s just a few days, but that transaction showing in the new year can make for a huge tax difference.
Remember that, in most cases, income is taxable when it’s received or made available to you (so you can’t hold a client’s check and defer it to the following year, for example). Expenses are typically deductible when paid, meaning when you mail the check or when you make the charge. Keeping accurate records yourself is therefore critical to claiming the maximum deductions.
So make your first tax-related New Year’s resolution to get your books straight and avoid the last minute hassle of searching for receipts and trying to remember what bill you paid or what donation you made. Start 2017 off in an organized way, and tax season will be smooth-sailing. If you have any questions, we can help.