Today, I’d like to share some of my best tips for preparing your small business taxes.
It is one of those words in the English language that most people love to hate… Taxes. But they are necessary and the law says you must pay. I want to share some simple and practical tips you can follow to make the process as simple as possible. No, I am not a CPA or financial advisor, but yes, these are things that have helped me survive doing my own business taxes.
7 Tips for Preparing Your Small Business Taxes
Please keep in mind these tips for preparing your small business taxes are listed in no particular order.
Tip #1: Get Organized
The first tip I can share with you for preparing your small business taxes is to get organized. Do not wait until tax time to start trying to figure out how much money you earned and how much you owe in taxes. You should be publishing a monthly profit and loss statement for your business every month, throughout the entire year, so you know where you business stands financially.
Have all of your important tax documents in one place, so they are easy to find. Have them sorted by category. Develop a simple end of year checklist for your business, based off the things you needed for the previous year to prepare your taxes. Being organized and having a game-plan will save you a lot of time and frustration.
If organizing is not your area of expertise, have your spouse or someone you trust take a few hours and help you get everything set up.
To make sure you meet the tax deadline on time this year and every year going forward, you need to stay organized all year and spend the time it takes to get your tax documents in order early on. This will speed up the process when it is time to file and ensure you hit those deadlines with ease.
Tip #2: Create Your Final P&L Statement
The next thing you want to do is create your year end profit and loss statement. This will have a detailed list of your income and expenses, so you know how much money your business earned (or lost) during the year. This will also give you a good idea as to how much you owe in taxes.
Hopefully, you’ve been updating this document every month during the year, so you could be proactive and pay quarterly taxes. If not, now is the time to do it. I also suggest you take a day and double check your totals to look for discrepancies.
Every business needs to prepare and review its profit and loss statement periodically – at least every quarter. Reviewing the profit and loss statement helps the business make decisions and to prepare the business tax return. Your business tax return will use the information from the P&L as the basis for the calculation of net income, to determine the income tax your business must pay.
Source: the balance
Tip #3: Identify & Look for Missed Deductions
There are thousands of legal tax deductions. Chances are you missed a few. Consider consulting with a bookkeeper or CPA in your local area to identify possible deductions you might have missed. This will be time and money well spent. Also, if you have a bunch of receipts you are unsure about, you can bring them to your CPA and get a YAY or NAY.
Most businesses can benefit from having a professional prepare their tax forms. If you do it yourself, at least run your documents by a tax pro. The tax pro can point out tax deductions that you or your software missed, as well as highlight red flags that might get you into trouble.
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Tip #4: Look at Previous Years Tax Returns
One thing I like to do is look at my tax returns for my business for the previous few years. This will give me a good idea as to what expenses I deducted previously, and will help me determine if I missed something with this year’s taxes. Also, I like to look at each category as a percentage of total revenue. What I look for are expenses that went way up or way down compared to previous years and I make sure that what I am currently deducting is justified.
Your previous year’s tax return is a compare, contrast, reference and roadmap resource all in one. It provides the framework for what your next year’s return will look like, and also helps you measure your business finances year over year.
Tip #5: Don’t Cheat
Paying taxes is a touchy subject to many business owners. As a result, some entrepreneurs try to cheat on their taxes. Remember this, the IRS has more lawyers on their payroll than you do on yours. Do not try to hide income or create fake expenses. They will figure it out! Just do the right thing. Report ALL of your income and expenses. Pay what you owe and not a penny more or a penny less.
Most Americans value honesty when it comes to filing their income taxes based on a survey. In fact, they’re far more likely to cheat in other aspects of their lives — like diets, tests and even romantic relationships — than on their tax return.
Source: credit karma
Tip #6: Find Out About Different Business Structures
As your business grows, you definitely want to explore different business structures. You might start out as a sole proprietor. That’s what most new business owners start out as. However, as your income grows, it might be in your best interest to change business structures to a LLC, S-CORP, or different business structure. Talk with your CPA about this. Make a list of questions to ask them. Watch a few YouTube videos and educate yourself about your different options and then have a good talk with your CPA and find out what they suggest.
The business structure you choose for your startup will affect your company from a legal standpoint, and it will have an impact on your taxes, as well. Before you decide on the structure for your small business, you should do some research and talk to tax and legal professionals for guidance. The better you understand your options, the more likely you’ll be to operate under the structure that will benefit your business the most.
Source: Cape Cod Times
Tip #7: Don’t Do It Yourself
Your time is valuable. There comes a point in every business when it’s important to hire an expert. Taxes are one thing you should not do yourself, unless you enjoy doing it and know what you are doing. Even if you know what you are doing and enjoy it, it’s still better to have a CPA do it. For most small businesses, it will cost you less than $1,000 to have a professional do your taxes. This is money well spent. You would be much better off focusing on what you are good at (growing your business), and hire someone else to do the taxes.
American tax law is incredibly complex. While failing to properly file your income or payroll taxes as an individual can become an untenable tax situation, it can spell doom for your small business. Falling behind with your business taxes can lead to tax liens or levies, wage garnishment and the end of your company altogether. According to the IRS, if you owe more than $1,000 in taxes, you must make estimated tax payments in the amount of 100% of last year’s tax liability, or 90% of the current year’s liability, whichever is smaller.
Source: Business News Daily
In review, these are 7 of my best tips for preparing your small business taxes. I hope you learned something from this post. On a side note, what tips did I miss that you would recommend? Leave a comment below to let me know what you think. I look forward to hearing from you.
Now I do need to give this disclaimer: I am by no means a tax professional. I strongly suggest you consult a tax attorney or Certified Public Accountant for the best tax advice.