The Questions Your Tax Preparer Will Ask About Your Books

When you hand your books to a tax preparer, expect questions. The good news is that they’re predictable, and each one is easier to answer when you’ve thought about it first.

The short answer: before you hand off your books, be ready to explain what each transaction is, how your loan payments split between principal and interest, which spending is business and which is personal, whether your payroll matches what you filed, when you bought and started using your equipment, and who you paid. The questions below walk through each one.

“What is this transaction?”

Unreconciled accounts and uncategorized items are a common reason a preparer has to stop and ask. Once the year closes, reconcile your bank accounts, credit cards, loans, and payment processors like PayPal, Stripe, or Square through December 31, and clear out anything marked “ask my accountant.”

“Is this loan payment interest or principal?”

A loan payment has two parts. Interest on a business loan is generally deductible. The principal portion isn’t, because it just pays down what you borrowed. Your lender’s year-end statement shows the split, and your books should match it.

“Is this a business expense or a personal one?”

Owner draws and distributions aren’t business expenses, and personal purchases paid from a business account shouldn’t be coded as deductions. The cleaner your business and personal accounts are, the fewer of these questions come up. Our post on record-keeping habits covers how to keep them in order.

“Do your payroll numbers match what you filed?”

If you have employees, the wages and taxes in your books should match your payroll provider’s year-end reports and the quarterly payroll tax returns you filed. The IRS compares those totals to your W-2s, so a mismatch is worth fixing before anything is filed.

“When did you buy this, and when did you start using it?”

For equipment and vehicles, your preparer needs the date, the cost, and when the item was ready for use, because depreciation generally starts on that date. Keep the invoices handy.

“Who did you pay, and do you have their forms?”

Your preparer will want a list of the contractors you paid, along with any 1099s you received. Our 1099 checklist walks through collecting that information.

What should I send my tax preparer, and how long should I keep my records?

Put your December statements, payroll reports, equipment invoices, mileage logs, last year’s return, and any IRS or state notices in one folder before you hand off. A safe rule is to keep your tax records for seven years after you file. Your state may require longer.

Not sure where your books stand?

If keeping your books ready for tax time feels like a lot, that’s the work we do at Two Roads. Our bookkeeping team keeps your transactions up to date and reconciles your accounts each month, and our Tax service pairs you with a dedicated tax professional for year-round, proactive support, so your preparer starts with numbers they can trust. Schedule a call and we’ll take a look at where you are.