Tax Preparation

From Panic to Process

🔄 Quick Recall: In the previous lesson, we managed accounts payable and receivable for better cash flow. Now we’ll use all our bookkeeping skills to make tax preparation painless.

Tax season doesn’t have to be stressful. If your books are clean, tax prep is just compilation—gathering numbers that already exist and putting them in the right boxes.

By the end of this lesson, you’ll have a year-round tax preparation system that eliminates the annual scramble.

The Year-Round Approach

Most people treat taxes as an annual event. Smart business owners treat it as a continuous process.

Monthly habits (15 minutes):

• Categorize all transactions
• Reconcile bank accounts
• File receipts for deductible expenses
• Note any unusual transactions

Quarterly habits (30 minutes):

• Review income and expenses
• Calculate estimated tax payments
• Adjust expense categories if needed
• Back up financial records

Annual habits (2-3 hours):

• Generate final financial statements
• Compile deduction documentation
• Review for missed deductions
• Prepare or hand off to tax preparer

Common Business Deductions

Here are deductions most small businesses can claim. If you’ve been recording transactions properly, you already have the documentation.

Operating Expenses

• Rent — Office, co-working space, storage
• Utilities — Electric, internet, phone (business portion)
• Insurance — Business liability, professional, health (self-employed)
• Office supplies — Everything from pens to printer ink
• Software — Subscriptions, cloud services, tools

Home Office Deduction

If you use a dedicated space exclusively for business:

• Simplified method: $5 per square foot, up to 300 sq ft ($1,500 max)
• Regular method: Calculate percentage of home used for business, apply to rent/mortgage, utilities, maintenance

Travel and Meals

• Business travel — Flights, hotels, car rentals (100% deductible)
• Business meals — Client meetings, team meals (50% deductible)
• Mileage — Standard rate per mile for business driving

Professional Development

• Courses and training — Including this one
• Books and subscriptions — Industry publications
• Conferences — Registration, travel, accommodations

Equipment and Technology

• Computers — Laptops, monitors, peripherals
• Furniture — Desks, chairs (business use)
• Section 179 — Deduct full cost of equipment in the purchase year (up to limits)

✅ Quick Check: If you use 150 square feet of your home exclusively for business, what’s the maximum home office deduction using the simplified method?

Receipt Management

The IRS requires documentation for deductions. Here’s a system that works:

Digital-First Approach

1. Photograph every receipt the moment you get it
2. Use a dedicated app — Expensify, Wave, or even your phone’s camera
3. Categorize immediately — Match to your chart of accounts
4. Store in folders by month and category
5. Back up regularly — Cloud storage (Google Drive, Dropbox)

What to Keep

Estimated Quarterly Taxes

If you’re self-employed, you likely need to pay estimated taxes four times a year.

Due dates:

• Q1: April 15
• Q2: June 15
• Q3: September 15
• Q4: January 15 (following year)

How to calculate:

1. Estimate your annual income
2. Subtract estimated deductions
3. Calculate tax on the result
4. Divide by 4
5. Add self-employment tax (15.3% of net earnings)

Underpayment penalty: If you owe more than $1,000 at filing time, you’ll likely face penalties. Pay at least 90% of current year’s tax or 100% of last year’s tax to avoid penalties.

Building Your Tax Preparation Packet

When it’s time to file, you should be able to compile these documents in under an hour:

Income Documentation

• Annual income statement (from your bookkeeping)
• 1099 forms received from clients
• Bank interest statements (1099-INT)
• Any other income documentation

Expense Documentation

• Categorized expense summary by account
• Receipt backup for major expenses
• Home office calculation
• Mileage log
• Health insurance premiums paid

Financial Statements

• Year-end income statement
• Year-end balance sheet
• Prior year tax return (for comparison)

Business Information

• EIN or SSN
• Business formation documents
• State and local tax registration

Try It Yourself

Create a tax preparation checklist for your business:

1. List your three largest expense categories
2. For each, note what documentation you have and what’s missing
3. Identify any deductions you might be missing
4. Set calendar reminders for quarterly estimated tax dates

Using AI for Tax Preparation

Try these prompts:

“I’m a freelance [profession] working from home. Based on common deductions for my industry, what tax deductions might I be overlooking? List them with typical documentation requirements.”

“Review this list of expenses and flag any that might qualify for tax deductions I’m not currently claiming: [paste expense list]”

AI is excellent at identifying deductions you might miss and explaining documentation requirements. However, always confirm tax advice with a qualified professional—tax law changes frequently.

Key Takeaways

• Tax preparation is a year-round process, not an annual event
• Monthly categorization and reconciliation eliminate the tax-season scramble
• Know your deductible expenses: home office, travel, equipment, professional development
• Photograph and categorize receipts immediately—digital-first approach
• Pay estimated quarterly taxes to avoid penalties
• Retain records for 7 years as a safe standard

Up Next

In Lesson 8: Capstone, you’ll put everything together by completing a full bookkeeping cycle from transaction recording to financial statement preparation.