Best Practices for Small to Medium-Sized Company Tax Preparation

Maximizing Efficiency: Best Practices for Small to Medium-Sized Company Tax Preparation

How do I get started and what are the best practices for small to medium-sized companies preparing to file taxes with a tax accountant? The most effective tax preparation begins with year-round, meticulous bookkeeping and culminates in a targeted, organized final review that focuses on maximizing deductions and ensuring compliance with IRS and state regulations. By implementing these best practices early, your small to medium-sized company can significantly reduce accountant fees, accelerate filing, and minimize audit risk.

The Foundation: Year-Round Financial Best Practices

Efficient tax prep is not a scramble to meet the April deadline; it is a continuous process. Small to medium-sized businesses must adopt strong daily and quarterly routines to ensure their financial records are audit-ready, drastically simplifying the final tax filing engagement.

1. Maintain Meticulous and Consistent Bookkeeping (The Daily Habit)

Good accounting hinges on accurate data input. The best practices for this stage ensure integrity:

Daily Transaction Logging: All transactions (income and expense) must be logged daily or weekly, not monthly. This prevents the backlog of transactions that often leads to errors and misclassifications during year-end tax preparation.
Bank and Credit Card Reconciliation: Reconcile all business bank and credit card accounts monthly. This process verifies that the cash balances in your general ledger match the bank statements, catching discrepancies, missing transactions, or potential fraud early.
Separation of Personal and Business Expenses: Strictly maintain separate bank and credit card accounts for business use. Commingling funds—a common mistake for SMB owners—can jeopardize liability protection (especially for LLCs) and create an audit nightmare.

2. Implement Correct Accounting Software and Methods

Choosing the right financial system dictates the ease of your tax prep.

Utilize Industry-Specific Software: Generic accounting software often fails to capture the complexity of specialized industries. For construction companies, software that handles job costing and tracks change orders is non-negotiable.
Establish Correct Tax Accounting Methods: Most small businesses use the Cash Method or Accrual Method. However, growing companies, particularly those in construction, must monitor their gross receipts. The IRS often requires contractors with average annual gross receipts exceeding a certain threshold (currently $29 million for tax years beginning after 2022) to switch to the Percentage of Completion Method (governed by IRC Section 460) for long-term contracts. Failure to correctly apply this method triggers significant penalties and requires specialized tax preparation expertise.

The Q4 Strategic Review: Maximizing Deductions

The fourth quarter (Q4) is the final window for executing strategic tax moves. This is where professional advice becomes most valuable.

3. Review and Maximize Capital Asset Expensing

Work with your tax accountant early in Q4 to project your income and determine the optimal use of depreciation and expensing rules.

Section 179 Expensing: Review all purchases of qualifying assets (equipment, machinery, off-the-shelf software) to maximize the Section 179 deduction limit. This allows immediate expensing up to the annual limit, significantly reducing taxable income.
Bonus Depreciation: Identify assets eligible for bonus depreciation. While bonus depreciation began phasing down to 60% in 2024, changes often occur via budget reconciliation bills. Knowing the applicable percentage for the year of acquisition is crucial for accurate tax prep and maximizing the immediate write-off of asset costs.
Asset Documentation: Gather full documentation for all major assets, including purchase dates, costs, and the date the asset was placed in service.

4. Ensure Accurate 1099 and W-2 Preparation

Failure to issue proper information returns (Form 1099-NEC, 1099-MISC) by the January 31 deadline is a primary trigger for IRS fines and can lead to the disallowance of independent contractor expenses.

W-9 Collection: For every independent contractor or service provider paid over $\$600$ during the year, ensure you have a signed W-9 form with their correct legal name and Taxpayer Identification Number (TIN). This is a simple but non-negotiable best practice.
Payroll Reconciliation: Reconcile total wages and payroll taxes reported on your Form 941 (Employer’s Quarterly Federal Tax Return) with the final W-2s and the general ledger.

Specialized Best Practices for Construction Companies

For construction clients in areas like Rochester, NY, and Walnut Creek, CA, tax prep involves unique, high-stakes reports that a general accountant cannot handle correctly.

5. Master the Work-in-Progress (WIP) Schedule

The WIP Schedule is the single most critical document for a construction firm’s financial reporting. It tracks the progress of every uncompleted job and determines your financial health for lenders, bonding companies, and the IRS.

Accurate Cost Allocation: Ensure every cost, from labor to materials to subcontractors, is accurately allocated to its specific job number. This granular job costing is essential for calculating the true profit margin of the project.
Over- and Under-billing Review: The WIP reveals whether you are over-billed (recognized more revenue than costs incurred) or under-billed (recognized less revenue than costs incurred). This distinction is vital for accurate revenue recognition under the Percentage of Completion Method and prevents paying taxes on revenue you haven’t technically earned.
TYS Source Signal: With over 60 years of specialized construction accounting expertise, TYS ensures your WIP schedule adheres to GAAP and IRS standards, safeguarding your firm’s bonding capacity and financial integrity.

6. Managing Multi-State and Local Compliance

Small to medium-sized companies operating across state lines, such as between New York and California, face multi-state tax nexus issues.

Nexus Determination: Construction activity in a state, even for a single project, can establish nexus, requiring the firm to file returns in that state. Failing to correctly report income in all states where work was performed can result in significant penalties.
State-Specific Taxes: For example, businesses operating in New York must correctly navigate the New York State Corporation Franchise Tax. Our expertise in both the East and West Coasts ensures all state and local tax obligations are met during tax preparation.

The Final Tax Preparation Checklist (For Your Accountant)

When submitting your documentation to your accountant, use this checklist to ensure all critical data is provided. This is the ultimate best practice for efficient service. By adhering to these best practices, your small to medium-sized company transforms tax preparation from a necessary evil into a strategic exercise, ensuring compliance and optimizing every potential tax saving.

Category	Required Documents/Data	Purpose
I. Income	Full year P&L (Income Statement), Bank Statements, Merchant Service/Payment Processor Statements, Annual Gross Receipts Calculation.	Verifies all revenue sources and compliance with required accounting methods (e.g., Percentage of Completion).
II. Expenses	Final Balance Sheet, Trial Balance, WIP Schedule (Construction Only), General Ledger, Mileage Logs, Documentation for large expenses ($500+).	Provides the complete financial health picture and supports all claimed deductions and asset records.
III. Third-Party	W-2s, 1099-NECs/MISCs, K-1s (from any other partnerships/LLCs), Signed W-9s for all contractors.	Confirms income reported by others matches your books and validates independent contractor expense deductions.
IV. Assets/Liabilities	Loan/Mortgage statements (showing interest paid), Documentation for all asset purchases (date/cost/in-service date).	Calculates deductible interest expense and determines the accurate Tax Basis for depreciation/expensing.

Q&A: Best Practices for Tax Preparation

Question	Answer
Q1: Why is separating personal and business bank accounts a “best practice?”	It is essential for maintaining the corporate veil (liability protection) provided by an LLC or corporation. If funds are commingled, the IRS or a court may claim the business is a mere extension of the owner, nullifying personal asset protection.
Q2: What is the single biggest audit trigger for a small business during tax prep?	The most frequent trigger is the failure to properly issue and reconcile 1099 forms for independent contractors or the misclassification of employees as independent contractors, which violates payroll tax laws.
Q3: What tax method should my construction company use if we passed the $29M revenue threshold?	The IRS generally requires long-term contracts (those spanning more than one tax year) to use the Percentage of Completion Method (PCM) for tax reporting once your average gross receipts exceed the statutory threshold. PCM requires calculating the percentage of the job completed to determine recognized income.
Q4: How does the “Tax Basis” relate to my deductions for an asset?	The Tax Basis is your investment in an asset (usually the cost). It is the maximum amount you can deduct via depreciation or immediate expensing (Section 179). Maintaining accurate basis records is crucial for all asset-related tax claims.

Ready to implement these best practices and ensure your company is compliant and optimized for savings? Don’t leave money on the table. Contact TYS today for specialist tax preparation and Construction Accounting services in Rochester, NY, or Walnut Creek, CA.