How do I prepare my contractor books for tax season?
Tax prep for contractors starts with getting your bank and credit card reconciliations current through December 31. Every transaction from the year should be categorized and accounted for. If you’ve fallen behind on reconciling, catch up before doing anything else. Your accountant can’t prepare an accurate return from incomplete records.
Review your job costing to make sure expenses landed on the right projects. Materials purchased in November for a job that started in December sometimes get miscoded. Labor costs shift between projects. Go through your major jobs and verify the costs make sense. This also gives you valuable information about which projects actually made money.
Gather subcontractor information for 1099s. Anyone you paid $600 or more during the year needs a 1099-NEC by January 31. You’ll need their legal name, address, and tax ID number. If you didn’t collect W-9s when you hired them, start chasing that information now. Waiting until late January makes it nearly impossible to track down subcontractors who have moved on to other jobs.
Compile your equipment and vehicle records. Large equipment purchases may qualify for Section 179 expensing or need to be depreciated over time. Your accountant needs to know what you bought, when you bought it, and what you paid. For vehicles, you need either actual expense records or mileage logs. The IRS requires contemporaneous records for mileage deductions, meaning you tracked it throughout the year rather than estimating in January.
Review accounts receivable to identify any invoices that won’t be collected. Bad debts may be deductible, but you need documentation showing the debt is genuinely uncollectible. Also look at accounts payable to ensure you’ve recorded all expenses incurred in the tax year, even if you haven’t paid them yet.
Pull together your gross receipts tax records if you’re filing in New Mexico. Your GRT payments throughout the year should tie to your reported revenue. Discrepancies between your books and your GRT filings create problems both with the state and with your federal return.
Separate owner draws from business expenses. Money you took out of the business for personal use isn’t a deductible expense. It needs to be recorded as an owner draw or distribution, depending on your business structure. Mixing personal and business expenses inflates your costs and creates audit risk.
Organize your receipts and supporting documentation. Your accountant doesn’t need every receipt during preparation, but you need them accessible if questions come up or if you’re audited later. Digital storage organized by category or vendor is easier to search than boxes of paper.
If your books are a mess and tax season is approaching, address that before meeting with your accountant. Having a bookkeeper for small business owners clean up your records first means your accountant spends time on tax strategy rather than sorting through disorganized transactions. That usually saves money overall and results in a more accurate return.
The contractors who have the smoothest tax seasons are the ones who maintain their books throughout the year. If that hasn’t been you, use this year’s scramble as motivation to set up better systems going forward.
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