How Do I Prepare for Tax Season? My CPA Knows What They Want, But I Don’t Know What to Give Them

We do it every year, gather our tax docs and send them off to the CPA.  In return we receive a completed tax return and the original documents back.  But what does the accountant really want to see, and what could help them better understand me, my tax situation and what I need? In this article I’ve got you covered.  Here is an insight to what I like to see from my clients.

 INDIVIDUALS

1. Gather your tax documents

In January, you should begin receiving many of your tax documents including, but not limited to W-2, 1099s, 1098s, IRS annual letters, etc. Designate a place to store these documents safely. We recommend getting into this habit throughout the year. Collect receipts, expenses, payments to contractors, etc., and store it all in one place. By the time you need to file your taxes, you’ve eliminated a lot of time spent tracking down these files.

You’ll also want to review charitable contributions you made throughout the year. Gather all documentation and lists and make sure the value of each donation is clearly stated. If you’re missing any written notices from the organizations you donated to, reach out and ask for it.

Pro tip: digitally storing files is best.

2. Organize your estimated tax payment details

If you made estimated tax payments throughout the year, compile that documentation. Make sure you have the dates and amounts for both Federal and State.  It is also helpful if you have a printed confirmation of these payments.

3. Review your 401(k) and IRA contributions

Look at how much you’ve contributed to your 401(k), individual retirement account (IRA), or other retirement plans. Can you contribute more, or have you hit the maximum contribution amount?

If you can contribute more, consider doing so before filing your tax return. It’ll help reduce your taxable income. You can contribute up to $19,500 to a 401(k) plan and $6,000 to an IRA in 2021.

4. HSA contributions

If you contribute to a health savings account (HSA), gather all of the contributions you made to your HSA.  Be sure to write down which tax year the contributions are for as contributions can be made retroactively each tax filing year.  If you can, print off a statement from your HSA showing all the dates and amounts of contributions made.

For 2021, the maximum annual contribution – including employer contributions – is $3,600 for singles and $7,200 for families.

5. Pass-Thru Entity (K-1)

Make sure you have all of your pass-thru entity documentation ready.  If your CPA doesn’t prepare the tax return for a partnership or S Corp you belong to, check in with that accountant to see if the K-1s are ready and send those directly to your CPA preparing your individual return.

6. Sole Proprietorship (Schedule C)

If you own a Sole Proprietorship, make sure you send a copy of your annual financial statements to your CPA, or provide them login information to your QuickBooks so they can access your records directly.  Whenever your accountant has direct access into your QuickBooks it’s usually the most efficient way for your accountant to pull necessary reports and can find many answers to questions, they may have directly in your records themselves.  Also, inquire with your CPA if they think it’s time for you to incorporate your business, or create an LLC.

7. Rental Property

Gather all your income and expenses for your rental properties for the year.  Be sure to include any major improvements made to the property during the year.  If you spend $2,500 or more on one improvement item, be sure to separate that out, write a description of what the improvement is for and the date it was completed.  For example, if you replaced a shower in the bathroom of the rental property for $5,000 on June 15, 2021.  Separate out this specific expense from all other repairs for your CPA so the asset can be properly identified and depreciated.

BUSINESSES

1. Complete monthly bank reconciliations through the end of the year

Regular bank reconciliations allow you to submit your tax documents earlier. Once your December bank reconciliation and yearend is closed out, you can focus on filing your tax return.

2. Ask your CPA if they need any new documents

Ask your CPA if they need anything new for 2021. Being proactive can help streamline your tax return preparation.

3. Send documents early

No need to wait. If you’re ready and have all your documents, send them to your accountant. They’ll never say no to receiving your files early. Just make sure you send them in a format that is helpful to their process. If they have provided you with online portals to upload your documentation and that is their preferred method, don’t drop off a shoebox of papers at their office. You may notice that your return is filed quicker, you have more time to ask your accountant questions, and your accountant’s response time is faster.

If you wait until the last minute, you may have to file an extension, delay a potential refund, and compete with others for your accountant’s attention. Also, your accountant will have less time to help you with any possible tax savings strategies they may think of.

4. Create a list of any major financial or operational changes

Did you make any big financial or operational changes throughout 2021? Changes could include doing business in new states, selling products online, buying or selling a business, etc. Also, did you receive a Paycheck Protection Program (PPP) loan or an economic injury disaster loan (EIDL)? Did you qualify for the employee retention credit? If so, your tax strategy may change, so make sure to communicate these changes.

5. W-2s & W-2 Summary

Provide your CPA a copy of all officer’s W-2s and a copy of the annual W-2/W-3 Summary.  Your CPA will need to tie out wages each year and individually report each officer’s compensation on the tax return.

 6. Tax Planning

If anything major changed since you and your CPA discussed tax planning prior to yearend make sure to inform them.  Also, be sure to communicate any goals you may have for your business, if you want to sell your business sometime in the near future, transition it to a son or daughter, or just retire and let it dissolve in the future.  Possibly you want to grow your business and would like advice and analysis done on your business on where you can make improvements, cut back on spending, incentivize employees, etc.

7. Discuss the latest tax changes

Thanks to the COVID-19 pandemic and change in administrations, many tax provisions were passed, extended, or revised to help businesses through the pandemic. You can qualify for new tax credits, deduct business meals at 100%, and more. You’ll want to take advantage of these tax incentives before they expire.

Schedule a time to talk with your accountant about the latest tax changes and any on the horizon. You may benefit from additional tax savings.  Don’t be afraid to spend a little time and money on your CPA.  They spend a lot of time and their own money staying educated and up to date on tax laws and changes.  They could help you save money, grow your business and investments and save your from possible future headaches.

Those are my tips on how to prepare for the 2021 tax season! This list should help streamline the tax process. Trust me, your accountant will appreciate it!

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