By: Cate Riley

By now, your 2011 tax work should be ‘in the can’ and well on its way to your tax preparer. If it’s not and you’re dreading the idea of even getting started on it, perhaps it’s time to rethink your approach to annual tax work.

Here in our back offices where we oversee several entities, we’re already 1/12th of the way through our 2012 tax work. That’s right, January is already done. All transactions are posted, bank accounts reconciled, adjusting entries done and documented, and lastly, everything is already in its permanent storage file box with the pertinent identifying data and destruction date for the box entered. Even our ‘household’ is included in this operation.

Whether your household is the only entity you oversee or if you operate one or multiple small businesses, getting ahead of the curve is the only way to go when it comes to taxes.

Years ago, we implemented a very simple system which has been tweaked over time. Our system works well whether you are paperless (think digital file boxes), still working in the paper world, or, as with most people, working with a combination of both.

Paperless is the goal, but most of us still deal with some compromise. We combine the harvesting of digital documents wherever we can from online (i.e. bank statements, receipts for online purchases) and scanning of hard copy items for storage in our digital tax files, with short notes containing the pertinent information for data entry into our computer program.

Going fully paperless is getting easier all the time. Full scale pdf writer/searchable/editable programs can get expensive but there are many inexpensive programs that allow you to ‘print’ to a pdf and store it in your digital file box.

You can also scan receipts easily and affordably with a mobile scanner offered in Windows or Mac. These scanners come with software for a document filing system that scans in everything including those thermal paper receipts that fade over time and become illegible.  The program also captures pertinent data on all documents and populates its database for organization and future use, such as financial information for your bookkeeping program and contact information from a business card. They’re very handy and easy to set up.

Our system in a nutshell:

1. The most important thing is to be using one of the many accounting software programs available. Our preference, Quickbooks Pro, is the most widely used accounting software and handles all our operations. It’s extremely affordable, considering the time it will save you on tracking your finances, and most importantly produces the reports you need to function and your tax preparer needs to prepare your tax returns.

2. By mid-January of every year, you will have finalized (bank reconciliations and adjusting entries) your prior year tax work which means you get to move last year’s physical tax file boxes to storage, whether that’s a farther back ‘back office’, your garage, a closet in your home, or an off-site storage area, so you can set up the current year file boxes.

The physical file boxes fit very nicely into a legal file drawer which makes for neatness and organization. It’s important to file all hard copy records into the box directly so you never have to touch them again until they go for destruction.

Be sure to keep important documents (deeds, titles, insurance policies, etc.) elsewhere as you may elect to schedule the boxes, as we do, for destruction after the minimum required holding period according to IRS guidelines. Our preferred method of ‘destruction’ is as starter fuel for our fireplace, cheap and useful. Digital tax folders and files should be set up to mirror the physical tax files.

3. In each tax box, set up the entire year of files. It’s more efficient to do them all at once rather than every month or quarter having to go through the steps of setting them up. It also has the effect of encouraging us to keep up with the tax work on an ongoing basis. For some entities, we set up quarterly files since there’s very little activity and others we use monthly files. In the quarterly files, the monthly documents are separated with a large paperclip.

With physical files, since you’re filing everything in a file box, the hanging folders and tabs don’t work very well so we use different colored Post-its to differentiate between the entities. We don’t use labels on the files since they will be destroyed and hopefully never looked at again. Why spend the money? We use a black Sharpie to mark the files with the entity and period for which the file is set up.

4. If you need to be entering data daily, you are probably at the point where you are the full time bookkeeper or you have a full time bookkeeper which would require a different system. You are also probably fully paperless at this point. Otherwise, depending on the volume of financial transactions you’ll be entering, set up a specific time weekly, bi-weekly or monthly to enter transactions on the computer.

Make the commitment to stick to it and then, of course, fulfill that commitment. Set your scheduled data entry time around the rest of your schedule, including time devoted to others and let them know that you are unavailable during this time so that you can complete the tasks uninterrupted. This is really important.

Bookkeeping software programs are very easy to set up and learn, and truly are as simple as using your checkbook, only much more efficient. They create all the reports (and then some) that you or your tax preparer will ever need. You can set up automatic transaction entry (e.g., your monthly rent or mortgage payment) so you only need to make a few clicks and the new transaction is entered. Quickbooks works well with a check printer and online banking. Also with Quickbooks Pro you can export to a spreadsheet program and manipulate the data any way you want.

5. As mentioned earlier, while we harvest online documents wherever available, it’s not always efficient to open each one while inputting data into our computer program. It’s also not efficient to open and enter the data in Quickbooks every time we do something online. That’s why we schedule a specific day to do the all the entry accumulated since the last time.

To get around that inefficiency, we use a simple receipt book and for each online transaction, we harvest the date, to whom paid, what it was for (needed to correctly categorize expenses), amount, confirmation number and which bank account was used. We then file the pdf where it belongs in our digital file and place the short note in the periodic file in the physical file box for entry into the computer at the scheduled time.

6. When the end of the month rolls around, once we receive (or harvest online) the bank statements, we’re ready to reconcile all accounts. This is a hard date on our calendars as we want to make sure the prior month is completely finished in a timely manner. Remember, the goal here is to keep up with the work flow every month so year-end is a breeze on the tax work.

7. Before you know it, year-end has arrived, the holidays are over (without any of the dread from looming tax work) and January is simply the month after December as far as finalizing your tax work. Zip, bang and you’re ready to get everything off to your tax preparer.

Time to start thinking about all that free time you’ll have. It’s a beautiful thing!