Actionable Tax Preparation Tips
Small business owners are busy individuals! As they typically need to swap out many hats during an average workday, thinking about longer-term tasks, such as their personal and business income taxes and accounting practices, can be difficult. For many small business owners, the two sets of taxes are interlinked.
While April isn’t too far behind us in the rearview mirror, it’s never too early to begin planning for the next tax cycle. It’s a good idea to do IRS tax prep all year long. This way, everything is organized and ready to go when tax season rolls around.
Ready to begin your annual tax prep checklist? Let’s look at top tax tips for individuals you can integrate into your planning.
How to Stay Organized For Taxes Throughout the Year
Routine and consistent organization is the key to correctly filing your individual and business tax returns annually. This way, you won’t have to scour around your home and workplace to find all the necessary receipts for tax filing.
One way to start your organizational system is to make a small business tax preparation checklist.
● Write a detailed list of all tax-related tasks needing to be completed
● Ascertain important tax dates throughout the year and put them on your calendar
○ Schedule and pay quarterly taxes before the deadlines
○ Issue W-2 and 1099 forms before the deadline (if you have employees)
○ File IRS Form 941 (if you have employees)
○ Note any other required forms for the IRS and your state tax collection agency
● Open a separate bank account for business-related income and expenses because this separates business funds from personal money, simplifying the tax reporting process.
● Utilize expense-tracking apps instead of spreadsheets
○ Organize and save receipts to enter into your app
○ Separate personal and business receipts
○ Keep paper receipts organized in case they are needed
● Separate paper receipts in different files for different types of deductions
● Set aside a dedicated block of time each week to work on taxes
Suppose you have a home office dedicated to your business (different from remote work). In that case, you can claim certain home improvement expenses and receive full or partial tax credits or deductions, depending upon the expense. Be sure to carefully organize these receipts and make them a part of your tax prep checklist.
Tip: Home improvement expenses must be directly related to your office space or work that benefits your office. (For example, a new kitchen floor or bathroom remodel would not qualify, but if your home gets a new roof or HVAC system, you can partially claim those expenses since these benefit the entire house, including your office.)
The Best Tax Tips for Individuals & Businesses
Filing taxes is typically a cumbersome task, but it must be done. Being prepared all year round will help to cover your bases and make tax filing easier. The following IRS tax prep tips can go a long way toward simplifying and streamlining the process.
Good bookkeeping and record-keeping
Forget stashing receipts and other vital tax paperwork in a shoebox or a desk drawer. This usually never ends well because important tax-related receipts get commingled with other records, lost, or accidentally thrown out. Instead, create strategic bookkeeping and record-keeping systems.
Create a dedicated file system
Some small businesses may prefer paper, but digitized records make it easier to organize, track, secure, and sort information.
Organize your receipts
Create a dedicated place for receipts and receipts only. Categorize them by date and type of expense so you can easily discern which ones will apply to your taxes. Accounting software can help with this task. Additionally, you can scan paper receipts to help reduce clutter and make specific receipts easy to find. Make regular backups of digital files to secure the information on receipts further.
Complete your taxes on time
Plan to complete and submit your tax return before the April deadline. While the IRS does permit extensions, they are costly. You’ll have more time to file, but you’ll still have to pay your taxes by the April deadline. If you’re late, the IRS charges interest and monetary penalties, increasing the amount of money you owe. Plus, if you’re due a refund, that’s less time for the money to be in your hands if you delay filing.
Embrace deductions
Small business owners usually qualify for several deductions, which are often referred to as “write-offs.” Deductions help reduce taxable income, which can help a small business put some money back into its budget.
What are deductions?
Deductions are costs incurred throughout the year necessary to operate a business. Claiming them reduces your taxable income. Through good organization, you’ll have the information to know what deductions you might qualify for to claim on your tax return.
Examples of common deductions
Deductions you can often claim include, but aren’t limited to, the following:
● Maintenance and repairs
● Advertising and marketing costs
● Workplace expenses
● Workplace utilities
● Expenses relating to your business or home office
● Legal and professional fees (e.g., an accountant or attorney)
● Health insurance for the business owner and employees
● Employee salaries
● Business insurance
● Depreciation on large assets (e.g., office equipment, vehicles, or furniture)
● Certain business travel expenses
● Educational seminars and conferences
● Other relevant expenses
To legally claim deductions on your taxes, careful records are a must. If you’re audited, you need to be able to back up any claims you’ve made. By organizing these expenses year-round, you’ll quickly be able to supply any “proof” required if you’re asked.
File electronically
The IRS and state agencies still permit taxpayers to file paper tax returns, but it’s inefficient. Filing electronically is faster, reduces the chances of errors, and ensures a faster refund if one is due. You can file taxes online, use tax software, or ask your accountant to file electronically.
Choose a reputable tax preparer
You can file your individual and/or business tax returns yourself, but it might be worth considering working with a reputable tax preparer instead. While you’ll pay the accountant or other tax preparer for their time, many small business owners find this expense to create cost savings. Tax laws are constantly changing, and it’s hard to keep current.
Your part of the tax process will be to organize and maintain tax records. Your tax preparer will know what to file, the best deductions and credits you can explore, identify which deductions and credits you qualify for, and any other obscure tax details many business owners often overlook. Working with a professional also helps ensure your tax return is submitted error-free.
Obtain your EIN
Small businesses planning to hire must obtain an Employer Identification Number (EIN) before hiring. Many entrepreneurs work for themselves and don’t have employees, so one isn’t necessary, but obtaining one is still a good idea.
EINs are like Social Security numbers but are tax IDs for businesses. Using them empowers you to enjoy opportunities such as opening business bank accounts, obtaining favorable loan terms, and applying for permits and licenses. Having an EIN also helps to streamline the tax process, especially since you don’t have to give out your SSN to others for tax purposes; simply supply them with your EIN.
To obtain an EIN, you’ll need to supply some information, including your legal business name, DBA designation, business address, phone number, and the date you commenced operation.
Other information you’ll need to supply is the name and Tax ID number of the person responsible for the business (you) and why you’re applying for an EIN. List your business entity type (e.g. LLC, sole proprietor, etc.) and supply the number of employees you have or plan to hire.
Once you’ve assembled and entered all required information, proofread your application and submit it.
Using a Tax Prep Checklist
Assimilating a tax prep checklist into your overall tax planning is easy once you get the hang of it. Here’s what you’ll need.
● Last year’s tax return
● SSNs, EINs, or any other tax ID
● Bank account numbers
● Financial statements (e.g., balance sheet, cash flow, profit/loss statement, etc.)
● Wages paid to employees
● Employee benefit expenses
● Income records, such as gross receipts, sales records, and other income-related information
● Cost of goods sold documentation if your company sells products.
○ Inventory value
○ Inventory purchases
○ Materials and supplies
○ Ending inventory dollar amount
○ Any other inventory-related documentation
● Charitable contributions records
You’ll also need to know the applicable forms to file, which aren’t the same for every business. Examples of forms include: 1099-INT, 1099-K, 1099-NEC, W-2, W-3, 1096, 940, 941, and Schedule K-1, to name a few. If you’re being taxed as a partnership, LLC as an S-Corp, or a corporation, you’ll probably have different forms to file.
Conclusion
Tax season is going to arrive every year like clockwork. It’s predictable, so it’s best not to procrastinate. While it’s an overwhelming process, it doesn’t have to be if you get ahead of the game and do small tasks throughout the year. Staying on top of taxes year-round helps to mitigate potential mistakes and reduces stress. Taking actionable tax preparation tips goes a long way toward easing the process.