Tax season doesn't have to be a nightmare for small business owners. If you own a small business, note the following tips to help you survive the upcoming tax season.
1. Prepare in advance!
Even if you're not as prepared as you'd like for the current tax season, you can always resolve to be prepared for next time. Start now by making sure you read the remaining points listed here. For starters, you can begin today by keeping meticulous records, accurately taking inventory, and familiarizing yourself with all the deductions that apply to your business.
2. Separate business and personal finances.
Business and personal financial records do not mix. This is one of the most common stumbling blocks for small business owners. The best advice to ensure no discrepancies is to open separate business and personal accounts. That means checking, savings, and credit card accounts. Keep one set for business and one established for personal use. This approach prevents having to sift through every transaction for the year when tax time rolls around.
3. Keep meticulous records.
No matter what records they are, make sure to keep them meticulously. Store them in a physical file or use a digital receipt tracker for expenses. Keep a well-organized invoicing system, either paper or electronic. Keep track of all charitable contributions, gifts or bonuses given to employees, and quarterly tax payments made. At tax time, you will have all the information you need right at your fingertips.
4. Prepare for payroll taxes.
If you are an employer with staff, you must report, withhold, and pay employee taxes. For each employee you are required to pay social security, Medicare, and federal income taxes. Your accountant or bookkeeper should keep up with this, or the payroll agency you use to calculate payroll should handle it. Either way, these are required by law and must be paid.
5. If you have inventory, track it.
If your business has a physical product (i.e., inventory), you must know how much you have on hand come tax time. You must report your business' inventory value, which is the dollar amount that you have tied up in unsold merchandise that you are holding. Some companies use inventory management software or a POS system to manage this, as it can be tedious and time-consuming if performed manually.
6. Understand your deductions.
To correctly evaluate your expenses as deductible, you must familiarize yourself with the IRS's deductible guidelines for small businesses. If you travel as part of your business, there's a guide, too. Deductions can get tedious. It is often best to have a reliable accountant familiar with your business to help you navigate those rocky areas.
7. Make retirement contributions.
If you're looking for end-of-year deductions, why not fill your coffers and plan for retirement? Add to your IRA or 401(k), as any contributions you make are tax deductible. The same goes for contributions made to employee retirement accounts.
8. Donate to charity.
Another great way to garner additional deductions is through your business's charitable contributions. It's a win for you on taxes, and it's a win for the charity, too!
9. Give year-end bonuses.
Rewarding employees with end-of-year bonuses can benefit you at tax time. Bonuses and employee gifts (there are limits, so check those with the IRS guidelines) are tax deductible. Again, this is another way to do some good and save on taxes.
10. Hire a qualified accountant or CPA.
The best way to know you are saving as much as possible on taxes is to hire a qualified tax accountant or CPA. They are up to date on tax laws and deductions and can easily guide you through the seemingly endless numbers when tax time comes. The price you pay them is also another deduction!