What Documents You Need for Tax Time

Most entrepreneurs dread the first few months of the year leading up to tax time. It is like the annual checkup with your business's doctor and time to face the outcome of the past year. This time carries a lot of stress, and understandably so. However, this stress is 100% avoidable because there is so much you can do to prepare and that preparation could take a matter of minutes.

The problem is that no one hands you a checklist of what you need to have ready (unless you have a really good CPA!)

The best approach is to reflect on the year in all the ways you earned income and think of each of those channels of income as chapters in a book. You are here to write the story of the year using these chapters. Some literally use file folders or color coding for this. It doesn't have to be all Marie Kondo style, just enough to be clear on what is what.

You will want to write down all the applicable chapters from the below list and make sure everything comes in the mail or email in the first few months of the year. Very often, taxpayers think they have everything and hand it over to their accountant to prepare, and then realize they missed a 1099 months later and need to amend. Make sure that if anything is still missing, you let your tax professional know.

Here is a rundown of the categories you will want to review:

WAGES

You will need to provide W-2s for all employment. These typically arrive in late January to early February. These forms will tell you everything you need to know. S Corp owners - remember to include your W-2 as well.

BUSINESS INCOME & EXPENSES

Depending on the type of business entity, there may be certain nuances to what you need to provide. One thing you will absolutely need is a Profit & Loss ("P&L") Statement for the entire tax year. This shows all business income and expenses. Make sure it is finalized and the books are closed and reconciled before handing this over to prevent any rework.

HOME OFFICE

If you utilize a portion of your home exclusively for business and it is your principal place of business, then you may qualify to deduct your home office. In order to do this, you will need to provide the square footage of the home, the square footage of the office and totals of all expenses paid to own and maintain the home during the year (rent/mortgage interest, utilities, internet, repairs, maintenance, insurance, security, etc. All home office decor and equipment is fully deductible and should be on your P&L already.

VEHICLES USED IN BUSINESS

If you use a vehicle for business and wish to deduct it, you must provide the business miles driven during the year, total miles driven during the year and total costs to own and maintain the vehicle (lease payments / interest on loan, insurance, gas and fuel, oil changes, car washes, repairs, maintenance, tires, etc.)

CAPITAL GAINS AND LOSSES

Most folks forget about this one. Even if you were not the person actively buying and selling investments in securities during the year, you may forget that positions were sold by your portfolio manager in order to buy new ones. It is best to review a broker statement from each portfolio manager to see if you have any realized gains or losses.

CRYPTO

If you traded cryptocurrency, there is a specific question on the tax form that asks about this and you want to make sure it is answered truthfully. Make sure to disclose to your tax professional whether you bought, traded or held cryptocurrency during the year.

REAL ESTATE /RENTAL INCOME & EXPENSES

An accurate accounting of rental income and expenses is crucial to reporting this properly. While your property may not be in an LLC, you need to have strong accounting for the transactions related to the property like property management expenses, repairs, transaction fees, advertising and more.

FIXED ASSETS

Were any assets sold, disposed of or purchased? Include any documentation showing this. We need to put together a really fun depreciation schedule for you, so the more info we have about these, the better.

OTHER INCOME

Did you have gambling winnings or earn prize money? You may be getting a W-2G for this. Did you make any money from interest or dividends? If so, you will want to provide a 1099-INT and 1099-DIV. Did you collect any jury fees? What about unemployment? You may get a 1099-G for unemployment compensation.

RETIREMENT

Did you contribute to or withdraw from any retirement accounts? The cool thing is that you can still contribute to a traditional tax-deferred retirement account by the tax deadline and take advantage of the benefit even if you file early. Make sure you remember, though, cause they will check to make sure you actually contributed. Also, remember that early distributions from retirement may get hit with a penalty on top of tax.

OTHER IMPORTANT ITEMS

Make sure you tell your tax preparer if you moved during the year or plan on moving. Let them know if the dependents changed at all during the year (new child, child moved out, etc.)

If you have student loan interest or tuition payments, make sure your documents for this are also included showing the amount paid during the year.

Check to see if you received any Economic Impact Payments (stimulus checks) during the year as well. Tax pros need to report this to see if you are eligible for the Recovery Rebate Credit.

Have proof ready for charitable donations to show the amount and to show it went to a 501(c)3 organization. For those donating more than $500, be prepared to itemize non-cash donations. Pictures also help for proof in the event of an audit.

Also, if you have children, document child and dependent care expenses like daycare costs. Add up out-of-pocket medical bills, personal property taxes paid, and real estate taxes paid as well. You should get formal documents for the taxes paid.

If you paid self-employed health insurance, you also want to have your 1095-A handy to show what you paid.

Lastly, make sure you have an accurate amount of estimated taxes you paid during the year, if any. Review your estimated tax vouchers you received with your prior year's tax return if needed.

Of course, there are always more documents that could be applicable here or some in the mail, but there are the most common ones I see and ones I missed from time to time. If you have any questions on what documents you need, ask your CPA or shoot me a text to 860-609-6374.