The new year is full of celebrations, resolutions, and new beginnings, but those aren’t the only things happening in Q1. Tax season has officially begun, and like your grandmother, the IRS would love to hear from you sooner rather than later.
We reached out to a few experts to shed some light on the most helpful tips they’d give to small business owners as they gear up for that all-important April 15 deadline. Here are five things that you’ll want to consider as you prepare to render unto Uncle Sam that which is Uncle Sam’s:
1. Consider hiring a tax professional.
Services like TurboTax and QuickBooks are tax deductible for small businesses, but depending on your situation, you may want a more customized experience. According to Avo Asdourian MBA, EA, AFSP, “hire a tax professional who specializes in the business industry. Managing your taxes can be highly complicated.
“While software like QuickBooks Self-Employed will help facilitate the process, some business owners may opt to supplement that software with an accountant that is familiar with the intricacies of taxes for the business industry.”
As your business grows and your accounting gets more complicated, hiring a CPA might make all the difference. But don’t wait too long before scheduling your meeting with them (more on that later).
2. Get all the deductions you qualify for.
Austin Carlson, an associate at Gray Reed & McGraw and Certified Public Accountant, had this to say about deductions:
“Many small business owners don’t realize that when they use any of their personal assets for business purposes, such as a laptop, home office, or car, they can get a tax deduction for that business use.
“For more savvy business owners, understanding the rules between business and personal purpose for travel can help maximize deductible travel fully within the IRS rules. Finally, the biggest tax benefits can often be found in taking advantage of the huge tax deferral opportunities for small business owners offered by the IRS for retirement planning.”
To learn more about retirement planning, and many of the other ways you can reduce your liability, check out this post from John Tucker.
3. Prepare all year long by saving receipts and tracking expenses.
Let’s think about doing taxes in a bit of an abstract way for a minute and compare it to a race. But not just any race–doing taxes can feel like a marathon. You wouldn’t try running a marathon a week after starting training, and you shouldn’t put off preparing your taxes until the last minute. Just because taxes aren’t due until April 15 doesn’t mean you should think that’s the only time of the year you should think about them.
In this article covering the basics of bookkeeping by Jennifer Lobb, several topics are covered, including how taking a far-seeing approach can benefit you in the long-run (pun intended).
“Bookkeeping is a year-long event, and that means you’ll need to keep track of your expenses and other transactions over that 365-day period. Sometimes, particularly if you’re a new business owner, you may not know what receipts you should keep or which expenses can be deducted come tax time.
“Saving receipts, no matter how small they are, will help you track your expenses and will help your accountant or bookkeeper get a clear and concise picture at the end of the year.
“Tracking and analyzing these expense receipts, preferably using an app made specifically for businesses, will also enable you to understand labor costs or costs associated with specific clients or projects.”
Don’t forget that running a business is a marathon, not a sprint. Instead of ignoring taxes all year long and scrambling in April, take small strides all year long so that you’re never caught unaware.
4. Get accounts exclusively for your business.
Be sure you’re not in the 20% of business owners who make this mistake. Avoiding mixing accounts makes things easier at tax time–but more importantly, it makes things easier in the long run. Crystal Stranger, EA, President of 1st Tax gave us an inside look at an issue holding business owners back:
“I’d say the biggest mistake I see is commingling of funds: when business owners use personal bank accounts to pay for business expenses or pay personal expenses out of business accounts. Sorting out which items really were business-related creates a mess at tax-time, and if you’re audited years later, it’s even tougher to work through.
“This is especially challenging if the business is structured as an S-corp because the money transferred to the business is deemed capital contributions, and the amounts transferred back to the taxpayer are sorted as being general distributions, rather than repayment of a loan. This means the taxpayer can end up with a deemed “wage” even if the business did not make a profit, and owe thousands in payroll taxes on the money transferred out of the company.”
Of course, you can avoid this issue before it ever begins by separating your personal and business finances. In addition to helping you keep your accounts straight, getting a credit card that you use exclusively for business-related purchases also helps you build your business credit score.
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5. Anticipate how much you’ll owe.
Prognostication isn’t just for wizards and merpeople anymore–you too can predict the future! Alright, that’s not really what we’re talking about, but there are steps you can take to be well-prepared and have a good idea of what awaits you in tax season.
Once again, Jennifer Lobb has some advice that applies to tax season, this time covering how you can anticipate long and short-term expenses:
“You can’t determine future revenue, but you can predict it by reviewing past revenue cycles and tax returns to help you get an idea of what you may owe. Additionally, you’ll want to review revenue on a regular basis (monthly or quarterly, for example) and calculate taxes owed.”
As you review your income throughout the year, you’ll be able to better predict–and set aside–your anticipated taxes. When done correctly, there should be no sticker shock when the time comes to file.
Keep these things in mind as you prepare for this year’s taxes, and it’ll feel like another regular day instead of an IRS-led apocalypse. Even if it seems like an insurmountable task, remember that there are plenty of things you can do today to get the process started.