BookKeeping, Tax Planning and Tax Preparation


Staff member
These are the rock, paper, scissors of your business. Each has a key role to play, and while you might find a good professional to help with your 'finances' you might find that they are limited to one or two of the three items. Let's take a look further.

As the name implies, BookKeeping is a system of record keeping and essential to provide data to your business on demand. This data could be performance related, such as profit and loss, or could provide insights into how much salary you could afford to pay yourself.
BookKeeping can be done on paper, but with the advent of free spreadsheets it's best to use that as a minimum. If budget allows, an online tool such as Quickbooks or Xero do this job very well.

The advantage of a Quickbooks/Xero solution is that they can pull in actual statements from your bank and match them up to bills (a receipt for a purchase) and invoices (sales/income generated). This matching process is called reconciliation, and when you reconcile correctly, you ensure that you've not forgotten to 'account' for everything come tax preparation time.

Tax Planning
Tax Planning taxes the data from the bookkeeping and projects forward to the impact of this at Tax Preparation time. Many accountants will simply take the BookKeeping and transliterate this into the Tax Prep, ignoring the opportunity to change the outcome of the tax prep via planning.
An example of planning would be to elect to make a large purchase on 12/31 vs 1/1 in order to select the year that will be used for the deduction at Tax Prep time.

Tax Prep without Planning ensures that you meet your responsibility to the IRS, but is naive and stupid. It's like just handing over your checkbook to the IRS and saying take whatever you think is fair.

Tax Preparation (Prep)
Tax Prep involves telling the IRS (and City/State agencies) how much you owe. You'll need to have records of your expenses and deductions (that come from BookKeeping/Record keeping). If your tax planning was correct, you should be telling the IRS that you've earned exactly the amount that you want to tell them using the appropriate laws.

Piecing it together
It really helps if you are able to visualize 'what will happen in April if I do nothing today?' the answer to this should come from records of income/expense for the year (your Books). Once you have that figure, it is important then to have the knowledge of the tax law in order to adjust that number, and control your fate. There's a lot going on here though, since many tax breaks to the individual are tied to Adjusted Gross Income (AGI) or a version of that called Modified Adjusted Gross Income (MAGI).

Mr Tax Reduction vs Mr Cashflow
Further to this, there's a constant battle between the desire to reduce taxes vs maintaining operating income for the business. If you have a profit of $10,000 going into December, there may be a temptation to Tax Plan and remove that tax liability. However, while engaging a tax deferral or deduction in December will reduce your taxes, it will also (in most cases) also reduce your operating cash, and therefore cause harm to your business growth. No decision will come without this cost.

How do I deal with X?
I'm often asked how to deal with X. A recent one, that I'll be addressing soon, is this from a reseller:

  • How do I deal with Inventory that has been returned and I can't sell?
The answer is actually 3 layers deep:
  • The BookKeeping Answer - how to create entries in your accounting system to reflect that this happened. There's many ways based on how you 'plan'.
  • The Tax Planning Answer - when to claim the event - does it have to be this tax year, or can you do it later? What options do you have?
    • Can you still donate the item?
    • What is your corporate entity (C corps have limits on donations, S and LLCs push the donation to the individual).
    • Do you currently itemize your taxes or take the standard deduction.
    • What happens to your tax liability if you take the item for your business use (EG using a camera for the warehouse)
    • What happens to your liability if you elect to take it for personal use?
  • The Tax Prep answer - what evidence do you need to keep in order to back up the reporting of this event, what documentation should be attached to the line items within the BookKeeping in order to have a solid system in the event that the IRS challenges your claim (an Audit).
Hopefully this thread will start to get people thinking about the three items distinctly and recognize what they need to focus on in their business. Note that out of the three, you only need to Tax Prep to survive.. but if you want to get ahead, you need Tax Planning, and if you want to be able to Plan and support your Prep effectively, you need BookKeeping in some capacity.

When screening a potential CPA or Accountant for your business, be sure to touch on each topic and their experience within them. Even the most highly educated professional should have a weakness or strength in different parts of this trinity.


Level 2 Member
Excellent timing, Matt! The third quarter is the one with the most opportunities to make money AND to mess up either tax liability, cashflow or, as for most resellers, BOTH!