Steps you can take now to make filing your tax return easier and save on your taxes.
Of course, last year’s tax collection season just ended. That’s the point.
The time to plan for NEXT small business tax season is before the previous tax filing year is over. If you wait until the end of the year, it’s too late.
This is true: There is no such thing as tax season. You should pay attention to your tax situation throughout the year.
The important thing is that you keep track of everything, every day, ideally in one place. You must record all business income and expenses, whether you think it is important for tax purposes or not. Keep track of all invoices, bank statements, financial statements, receipts and vouchers. This will save you from searching and scrambling next spring, prevent costly tax mistakes, and give you all the deductions and credits you deserve.
Here are some other things you can do to prepare for the next tax year NOW.
Set up an accounting system
How do you support your books?
A spreadsheet may be sufficient for financial record keeping for some very small businesses and self-employed individuals. If it works for you, keep doing what you’re doing.
However, the spreadsheet is not reliable enough for companies that are out of the start-up phase. There are many cost-effective accounting software and systems designed for small businesses, including:
Each package offers different features, so you’ll be able to find one that will work for your business. Some even come with software tax capabilities that include built-in tax forms for your federal and state taxes. No matter what you choose, as long as you use it consistently throughout the year, you’ll be well prepared to pay your taxes come spring.
Update your accounting tools
If you already have an accounting system in place, ask yourself: Are there gaps or inefficiencies in your financial tracking process? How could you make things better or more efficient? In short: Is your bookkeeping method serving you well, or is it frustrating you? The time to set things right is nowand not next spring.
Choose an accounting method
Once you’ve set up your accounting or bookkeeping software, you need to choose the right one accounting method for your type of business. The most common methods available to small businesses are cash and accrual.
- Cash accounting is an accounting method in which payment receipts are recorded in the period in which they are received and expenses are recorded in the period in which they are paid. In the simplest form, income and expenses are taken into account when receiving and spending cash.
- Accrual accounting allows a company to record revenue before receiving payment for goods or services sold, and expenses are recorded before the company is paid for them.
A professional accountant can advise you on the method that is best for your business.
Plan tax payments and declarations during the year
The IRS expects you to pay taxes as you earn income throughout the year. Payments can be in the form of estimated tax payments or withholding. The filing schedule for corporations and other types of business entities is different. The good news is that the IRS offers a tax calendar you can use on desktop. You can also receive email messages from it or sync it with your work calendar. This takes the guesswork out of when you need to make tax payments.
Also, if you have employees, you should plan to withhold federal income tax, Social Security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes during the year. Finally, if you are employed by an independent contractor and earn more than $600, you also need to file Form 1099-MISC until January 31.
Separate personal and business expenses
In addition to confusion at tax time, mixing your personal and business finances can prevent you from qualifying for a small business loan or building an independent credit profile for your company.
It is a wise move to create a separate business structure for your organization, such as becoming a sole proprietorship, corporation, limited liability company (LLC) or partnership. Then open business bank accounts and implement an accounting system. At the very least, use a unique credit card to track business expenses.
Failure to break down your expenses throughout the year can cost you many hours of sifting through bills and statements to determine what is personal and business transactions.
While you’re at it, keep a separate business calendar. This will help you remember meetings, trips and other business activities and synchronize expenses with them.
Consider hiring a tax professional
Many small business owners benefit from having their taxes handled by professionals. An experienced accountant can make the most of your deductions and credits, which typically change every year and are impossible to keep track of. Working with a Certified Public Accountant (CPA) or other tax professional can reduce your stress during tax season and pay off by helping you minimize your tax burden.
Find out what deductions you can claim
The worst time to determine that federal tax deductions you are entitled to it when it comes time to use them in the spring.
Many small business owners don’t claim all the deductions they’re allowed because they don’t have documentation to prove they’re entitled to them. Deductions you may be eligible for include:
- Payments to employees: Cash payments to part-time, full-time or contract workers are deductible.
- Professional and legal expenses: Any money paid to your lawyer, accountant and tax advisor is tax-free.
- Advertising costs: This can include anything from website development to travel to conferences and trade shows.
- Property: Property deductions include expenses related to any property used for business purposes. Land and investment property are not deductible.
- Home office: You can write off interest on your rent or mortgage payment and some utility costs if you measure and document the exact dimensions of your office. If you want, you can deduct five dollars for each square foot of home office space up to $1,500.
- consumables: Office supplies, including paper, pens, and toner, are deductible if used for business purposes.
- Equipment: Equipment is anything that will last more than a year, such as a computer or a production machine. You can write off up to $500,000 in business equipment purchases because of the Section 179 deduction.
- telephone: You can deduct phone expenses for business calls. Be prepared to look at your phone bill and determine the percentage that is used for business purposes.
- interest: If you use a loan or credit to finance your business, you can deduct the interest you pay to finance companies.
- travel: The IRS allows you to deduct one hundred percent of the cost of business trips from your taxes.
- Car and Mileage: If you use your car for business, you can deduct direct expenses or mileage used for business from your taxes. Use a tracking program to monitor business mileage throughout the year.
- Pension: You can deduct any payments you make into a retirement plan tax-free.
- Insurance: Many insurance premiums are treated as business expenses by the IRS and can be deducted. However, some motor and life insurance premiums may be prohibited. If you own a sole proprietorship, partnership, or S-Corporation, you may also be able to deduct insurance premiums for yourself and your family.
- Startup costs: You can deduct many of the costs of starting your business because the IRS considers them capital expenses.
- Educational activities: The cost of seminars, classes and conventions can be deducted if they improve your business or work skills.
- Charitable contributions: Many businesses donate to charity. You may be able to write them off if they are properly documented.
A tax professional can help you plan now for small business deductions you can claim in the spring.
Take advantage of tax benefits
If you can, claim a credit instead of taking a deduction for expenses. A credit usually reduces tax liability more than a deduction. Check out what credits you can get from the IRS Form 3800 or with your CPA. Loans are rare and have complicated rules. Two popular loans:
- Healthcare: Use it Form 8941 to determine your eligibility for health care tax credits. They are offered on a sliding scale. If you have fewer than 25 employees and pay 50 percent or more of their health insurance, you can get a tax credit of up to 35 percent of the costs.
- Veterans: The IRS offers a credit if you hire certain unemployed veterans.
IRS tax credits aren’t easy to come by, but they can pay off big.
Avoid audit traps
Don’t make the typical mistakes that can get a small business flagged by the IRS because it looks like you’re trying to break tax laws.
- Misclassification. Never treat employees as independent contractors. This is a sure sign of tax evasion.
- Home office deduction. Be able to prove your calculations. Otherwise, you may get into trouble with taxes.
- Don’t subtract too much. When your deductions exceed your income, it can seem sad.
- Don’t mess with payroll taxes: If you use employee withholding taxes to fund your business, you will be personally responsible for paying the IRS, along with significant penalties.
Aim for smart refunds
Did you get a big tax bill this year? Taxpayers who are actually giving the US government a big, interest-free loan. Adjust your withholding so that you receive less compensation next year.
Tax season really isn’t a season. This is a year-round activity. Use these tips to ensure you’re 100 percent prepared to file next year’s income tax return well before the deadline, while maximizing your deductions and avoiding red flags.