Your books are a year behind and tax season is coming: how a small business catches up

The business is doing fine, and the books are a mess

Sales are up, the crew is busy, and QuickBooks has not been opened since spring. Bank feeds have piled up thousands of unmatched transactions. There is a folder of receipts, a few invoices nobody recorded, a loan that was never entered, and a vague sense that the tax bill last year was bigger than it should have been. Now a deadline is approaching, and the thought of handing this to anyone is embarrassing enough that you keep not doing it.

We at Hockaday CPA in Frisco have worked with individuals and small to mid-sized businesses for over 35 years, and I can tell you that this is the single most common situation that walks through the door. It is not a character flaw. It is what happens when a person who is good at their business is also expected to be a bookkeeper. This guide explains what catching up really involves, what you can do yourself this week, why the cleanup is where tax planning starts, and what to expect when you bring it to a CPA. It is general information, not advice for your specific return; a licensed CPA who sees your records can give you that.

Why books fall behind, and why it costs more than it looks

Bookkeeping falls behind because it has no deadline until it suddenly has one. Every week it is the easiest thing to postpone, and every week it gets harder to restart, because the transactions no longer make sense from memory. A deposit from June is a mystery in December. Meanwhile, decisions are being made on bank balances instead of actual profit, which is how businesses end up surprised at year end.

The cost shows up in three places. The first is the tax return, where missing expenses mean paying tax on income you did not keep, and missing income means penalties if it surfaces later. The second is planning: most legitimate tax strategies have to be executed before December 31, and you cannot plan around numbers you do not have. The third is time. A year of unreconciled books takes many times longer to fix in a rush before a deadline than it would have taken to maintain, and rush work costs more.

In Texas there is no state income tax on individuals, but businesses still deal with federal income tax, payroll taxes, the state franchise tax and sales tax, each with its own filings and deadlines. Clean books are what let a CPA tell you where you stand on all of them.

What you can do this week before you hand it to anyone

Gather the documents, not the answers. You do not need to categorize anything yet; you need to make sure everything exists in one place. Download bank and credit card statements for every business account for the entire period. Collect loan statements, including vehicle and equipment loans and any line of credit. Export your sales or invoicing records from whatever system you use. Pull payroll reports if you have employees, and 1099s or contractor payment records if you use subcontractors.

Then make a list of the things a CPA cannot see in the bank feed: cash sales, personal expenses that went through the business account, business expenses you paid personally, equipment you bought, money you put into or took out of the business, and any new accounts or loans opened during the year. Finally, find last year's tax return and any prior financial statements, because the cleanup starts from the last point where the books were right. Resist the urge to start categorizing transactions late at night; miscategorized entries take longer to undo than blank ones.

• Bank and credit card statements for every business account, full period
• Loan, line of credit and lease statements
• Sales, invoicing and merchant processor reports
• Payroll reports and contractor payment records
• A list of cash, personal and owner transactions the bank feed will not explain
• Last year's return and the last correct set of books

When behind becomes urgent

Books that are a few months behind with a deadline well ahead can be caught up at a normal pace. The situation becomes urgent when a filing deadline is within weeks, when you have received a notice from the IRS, the Texas Workforce Commission or the Comptroller's sales tax office, when a lender or landlord is asking for financial statements, when you are bringing on a partner or selling the business, or when you simply have no idea whether you made money this year and it is already the fourth quarter.

A notice deserves its own urgency. Letters from tax agencies have response deadlines, and ignoring them turns a question into an assessment. If one has arrived, do not call the agency and improvise; bring the letter to a CPA who represents clients in audits and inquiries, and let the response be organized.

How we clean up a year of books

A cleanup begins at the last reconciled point. From there, we set up or repair the chart of accounts so that categories mean something for your business, then import and match every bank and credit card transaction for the period. Unexplained items go on a list for you, and we work through it together rather than guessing. Loans are entered with their balances and interest split correctly. Owner contributions and draws are separated from income and expenses. Sales records are reconciled to deposits so that revenue is complete and not double counted.

Each account is then reconciled month by month to its statement, which is the step that makes the books trustworthy. Fixed assets are recorded so depreciation can be taken properly. Payroll is tied to the filed payroll reports. When the year balances, you receive financial statements that show what the business actually earned, and we sit down to go through them with you, because the numbers only matter if you understand them.

That meeting is also where tax planning begins. Clean books let us see whether your entity structure, your compensation, your retirement contributions and your timing of purchases are working for you. Our Optima Program is a structured tax-planning service for taxpayers who qualify for savings beyond a standard return; the firm states it can save some qualifying taxpayers between two and twenty thousand dollars or more per year, and whether you are one of them depends on your numbers, which is why the cleanup comes first.

• Start from the last reconciled period and repair the chart of accounts
• Import, match and categorize every transaction; list the unknowns for you
• Record loans, assets, owner contributions and draws correctly
• Reconcile every account to its statements, month by month
• Tie payroll and sales records to filings and deposits
• Deliver financial statements and review them with you
• Evaluate tax planning opportunities from the clean numbers

What determines what a cleanup and return cost

We do not publish fee schedules because scope varies so widely; pricing is discussed once we have seen the records. The drivers are the number of accounts and transactions, how many months are behind, how much of the activity is unexplained and needs your input, whether payroll and sales tax are involved, and whether prior years also need correcting. A business with two accounts and clean sales records is a different project from one with six accounts, cash sales and a merchant processor nobody reconciled.

The return itself depends on entity type and complexity. The real cost question, though, is the one people forget to ask: what did disorganized books cost in overpaid tax and missed planning last year? In our experience that figure is often larger than the fee to fix them.

Choosing a CPA for a small business that got behind

Ask whether they do the bookkeeping cleanup themselves or expect you to deliver clean books. Ask who you will actually talk to and whether they answer the phone during the year, not only in March. Ask about experience with your industry and your software, and whether they handle payroll and sales tax as well as the income tax return. Ask what they do when a notice arrives, because representation before the IRS and state agencies is a separate skill.

Ask about planning. A preparer records what happened; a CPA who plans helps you change what happens next year, and the difference shows up on the return. Finally, ask about the first meeting. Ours is free, and it is where we tell you honestly what the cleanup involves and what we think it is worth.

• Handles cleanup, bookkeeping, payroll and returns in one office
• A named person who answers the phone all year
• Experience with your industry and your accounting software
• Represents clients before the IRS, TWC and the Comptroller
• Offers planning, not only preparation
• A free first meeting with a candid scope

The habits that make the mess worse

Mixing personal and business spending in one account is the first, and it doubles the time to sort every month. Categorizing transactions in bulk from the bank feed without checking them is the second; it creates books that look done and are wrong. Deleting transactions that do not make sense is the third, because the money moved whether or not it is recorded. Paying contractors without collecting their information is the fourth, and it becomes a scramble in January.

Ignoring agency letters is the fifth and the most expensive. And treating the CPA as someone you see once a year is the sixth; most of the savings we find are only available if we talk before the year ends.

What happens when you bring the shoebox to us

You schedule a free consultation at our office on Lebanon Road in Frisco or by phone. Bring what you gathered, or just bring the situation; we have seen every version of it. We tell you what the cleanup involves, how long it will take, what it will cost and what deadlines are in play. If you decide to go ahead, we set you up to send documents securely and we get to work, checking in with you only for the items that need your memory.

When the books are clean, we review the financial statements with you, prepare the returns, and talk about what should change for next year, whether that is a bookkeeping rhythm you can keep, payroll handled by us, or a planning engagement. Our team includes people who have worked as CFOs, auditors and bank managers, and we serve businesses across Frisco, Plano, McKinney and the northern suburbs of Dallas. The goal is a business owner who knows their numbers and is never embarrassed by them again.

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