Your taxes can be overwhelming, especially if it’s your first year in business. But, not all hope is lost. Whether you’re a first-time business owner trying to understand the basics or a serial entrepreneur trying to streamline the process, we’ve collected some tips and tricks to help you get through tax season.
Make Sure Your Books Are Complete & Accurate
Whether your bookkeeping is online or done by an in-house employee, you need to make time to look at your books and get ready to file. Your bookkeeping solution can help you stay organized and will likely help identify what your tax preparer will want before they even ask.
Schedule time to review the year’s books. Make sure any question marks have been resolved and your accounts are reconciled. Take the time to review your balance sheet, look at things you’ve purchased, and track your mileage if you’re using your personal vehicle for business purposes. Look for a list of all of the things you could be writing off because there’s a lot out there.
Some of the items you’ll need are:
- Bills & Invoices
- Business receipts
- Credit card receipts
- Canceled checks
- Credit card statements
Meet With Your Tax Preparer
Just like getting your books ready, make the rounds with your tax preparer, too. Get a list of what they’re looking for, so you don’t have to make multiple trips. Together, the two of you can make a plan, because when it comes to taxes, you don’t want any surprises. Just ask Willie Nelson.
Categorizing your expenses correctly is important, especially when your preparing for tax time. Due to the Tax Cuts and Jobs Act (TCJA), there have been changes in what you can deduct, which means it’s even more important to pay attention to your meals and entertainment expenses.
According to the TCJA, meals with customers and travel meals are only 50% deductible. However, meals provided for a recreational event, like a company holiday party are 100% deductible. Take the time to categorize what you’re spending money on because it will matter come tax time.
Gather Bank Statements
Tax preparers are going to want to see your bank statements, so they can compare them to your balance sheet. By comparing your bank statements to your balance sheet, your tax preparer can ensure that all your expenses and revenues are accounted for.
Collect Out-of-Pocket Expenses
Have you made business purchases using your personal accounts? While business expenses made using personal funds are legitimate tax deductions, they are often overlooked since they are not included in your business bank and credit card statements. Make sure you check your accounts for anything that could be considered work-related.
The same goes for making personal purchases on business credit cards. If you’re out and you buy some paper towels for the house using your business credit card, that’s okay. Record personal expenses in your bookkeeping system, so they don’t get added into businesses expenses.
Gather Receipts for Asset Purchases
It’s important to keep your receipts for assets purchased in order to account for depreciation. Depreciation enables you to reduce the value of an asset over time which will ultimately decrease your tax burden.
An asset could be:
Your tax preparer will need to know what your assets are when you purchased them and how much they cost to determine depreciation.
Keep Accurate Employee Records
Do you have employees mixed in with contractors and freelancers?
If you’ve paid a contractor over $600, you need to issue them a Form 1099-MISC, which means they are responsible for paying their own taxes. For your full-time employees, they’re issued a Form W-2, which covers wages, tips and other payments during the tax year.
Budget for Taxes
No matter how much you write off, you’re probably going to owe taxes. Don’t let those costs sneak up on you. Make sure you plan ahead, allocate a budget for taxes, and keep in mind the important deadlines.
If you need to file an extension, don’t sweat it. It’s better to file an extension without penalty than file late. In order to file for an extension, work with your tax preparer or use the IRS Free File.
Consider the Details & What’s Changed
Do Your Loan Balances Match What’s on Your Balance Sheet?
A big mistake small business owners make is recording the entire amount of their loan payments as a decrease in liability. This causes the loan balance to be inaccurate on the balance sheet and also doesn’t separate interest paid. Payments against the principal aren’t tax deductible, but interest is.
Did The Business Change Hands?
If you opened a restaurant and your partner of 20 years leaves the business, you need to let your tax preparer know. Changes in ownership affect equity and your books.
Take It One Step At A Time
Tax season is hard. If you’re working with a tax preparer, just know they’ve seen it all and likely know what you should do if your records got misplaced or you forgot to save a receipt. Again, if you need an extension, ask. The extra time will help you get documents in order and make you less stressed out. It’s better to ask for an extension rather than file late and file with a bunch of documents missing.
Paying taxes is just a part of doing business. Do your homework and plan ahead. Get everything together and consult your bookkeeping solution and tax preparer as early as possible. Tax time is hard, but it doesn’t have to be a nightmare if you’re prepared.
Still feeling unsure about tax requirements? Check out more blog posts on the topic for some additional help.
Senior Tax Accountant