Tax filing is not exactly something business owners look forward to. There may be those who eagerly submit their financial statements and business taxes as soon as the tax season starts but few do it because they love the tax process. Most business owners would prefer to focus on other business priorities than taxes. And no one can blame them. After all, the success of their business depends on their hard work. However, taxes must be paid, and the sooner you do it, the better. Here are 5 tips meant to simplify the tax process, keep up with the tax calendar, and save some money along the way:
1. Put together a business tax preparation checklist
If there is one thing business accountants love the most it is checklists. They simply make everything easier to accomplish, not to mention the satisfaction and boost of serotonin you get every time you check something off your list. A business tax prep checklist is vital for the financial health of your business. Your business tax checklist will help you stay organized, have a plan, and keep an eye on tax deadlines. No one wants to miss out on tax deductions or pay penalties! Here is an example of a business checklist created in order to help you with your tax payment and business tax filing:
1. The type of business tax return you have to file:
- sole-proprietorships/single-member LLCs: schedule C
- partnerships/multi-member LLCs: form 1065 and schedule K-1
- corporations: form 1120
- S corps: form 1120-S
2. The deadline for your tax filing:
- partnerships/multi-member LLCs and S corps: March 15
- sole proprietorships/single-member LLCs/corporations: April 15
3. The business records you need for the filing process:
- taxpayer identification number (EIN or SSN)
- income statement
- balance sheet
- bank statements
- credit card statements
- payroll records
- the previous year’s business tax return
- estimated tax payments
4. The tax deductions your business can claim:
- business mileage
- office supply deduction
- travel deduction
- business expenses
- charitable contribution deduction
5. Records of estimated tax payments
6. Filing extension if necessary
7. Tax professional consultation if necessary
2. Separate your business from your personal expenses
Just as business and pleasure don’t mix well, business and personal expenses should always have their own separate records. Even though it is not against the law to combine your business and personal expenses, it will not prove to be beneficial for your company regardless of your business structure.
Intermingling your personal and business bank accounts usually causes confusion around tax time and may cause the IRS to take a look at your personal accounts. Although you have nothing to hide it is best to keep the IRS out of your personal accounts.
Furthermore, if you are self-employed and run your business from home, don’t mix business expenses with other home expenses. Your goal is to claim home office deductions and find it easy to track income and expenses. Get a separate bank account and credit card and keep it nice and clean.
3. Keep your deductions reasonable
The thought of getting more money out of your business is an enticing one and it is tempting for many business owners to find tax deductions that do not stay in compliance with the tax laws. Don’t exaggerate your deductions because your business entity might expose itself to an IRS audit.
For example, not all meal expenses are deductible when traveling. The same applies to client gifts. Only part of these expenses can be included as deductions, so make sure you record them correctly. When in doubt, you can always check with a tax preparer who can clarify things for you.
The IRS might see a red flag if this year’s expenses are a lot higher than last year or uncommon for the type of business you run. Small expenses that may not seem significant enough to add to your deductions can add up to significant amounts when totaled annually.
4. Be thorough with your business records
Your business records are the financial foundation of your company. It is necessary for your business to have a solid foundation that can withstand anything the IRS might throw its way. Tax filing is not a guessing game. Everything you file and claim needs to have solid proof and accurate paperwork to back it up. This applies to any business type and business owner.
It is important to focus on your balance sheet and income statement. Whether you’re working with a professional tax preparer or use business tax software, make sure your business records are on point, correct, and accurate. Your income statement provides an overview of your business income and expenses and your balance sheet provides information regarding your business assets, liability, and equity.
Both your income statement and balance sheet should be backed up by supporting documents such as purchase orders and invoices from sales of goods or services, bank statements, credit card statements, and payroll records. It is also important to have records of your estimated tax payments and your previous year’s business tax return at hand.
5. Document your business expenses
Most of the time, receipts are enough to document your business expenses, such as supplies, utilities, insurance, or professional fees. However, some tax breaks may require more than just a simple receipt. This is the case with travel expenses, car deductions, home office tax deduction, meals, and bad debt.
You can qualify for tax credits if your business has been involved in actions that benefit others, like small employer health insurance, disabled access, and work opportunity. For example, if your business uses green energy to produce products or services or gets government contracts to provide social services, you’ll get tax credits to help you keep the business going. Both tax deductions and credits will lower your tax liability, but only if you meet certain IRS requirements.
Your business expenses play the most important part when you’re filing for tax deductions. Learn all there is to know about applicable business expenses that benefit from tax breaks available to small businesses. Tax laws have been designed to be complex and are bound to change often due to the legislative process. Consult with a professional preparer to make sure you capitalize on all tax breaks available at the time of filing.