Tax Thursdays! Seven tips for breezing through next tax season
Welcome to the FreshBooks Tax Thursdays series! We know a lot of small businesses struggle with taxes, so we’re hoping to help make it a little easier by featuring advice from leading accounting professionals every second Thursday from January to April.
With the tax deadline now passed and the season winding down, many are celebrating the end of stress and panic over getting their taxes filed on time. While personal taxes are a pain, for small businesses, tax time can be an absolute nightmare, costing entrepreneurs energy, money and worst of all, time deterred from profitable business pursuits. Filing past the deadline can be extremely hazardous to small businesses; it may cause them to be flagged for a potential audit or incur heavy late fees, potentially costing them a substantial amount of money that could have otherwise been saved.
Even though next year’s taxes are likely the last thing anyone wants to think about right now, being proactive now can make for smooth sailing through tax season. Understandably, small business owners would much rather expend their efforts on billable time than on administrative tasks, so there are many financial benefits to getting accounting matters automated and organized early.Small business owners need not fear the taxman, as long as they are organized, prepared, and follow Freshbooks’ 7 summer tax tips for small businesses to stay on track and save money:
1. Be Structure-Savvy: The way a business is registered dictates that company’s tax structure. With varying business types and subsequently, varying tax benefits and consequences, understanding their company’s structure will allow small business owners to develop a logical and effective tax savings plan. (The IRS website has many free resources available to make sure businesses are in compliance.)
2. Don’t be a shmuck – deduct: Expenses that reduce the total taxable income of a company can be deducted at year-end. Any business-related expenses that are relevant to the operation and betterment of the company, such as office furniture, can be written off, amounting to significant potential savings.
3. Start saving for retirement: Contributions to an IRS-approved Independent Retirement Account (IRA) can be written off, reducing a company’s total income subject to taxation, enabling owners to benefit from money that would otherwise be sent off to the IRS.
4. Get your head IN the clouds!: Small business owners are increasingly switching from desktop-based financial software to cloud-based solutions. Cloud systems are based online and offer small businesses access to their financial records anywhere on a browser by an authorized individual. Some are even compatible with smart phones, allowing easy access on-the-go. Taking advantage of modern cloud-based accounting services can make it easy to keep books up-to-date throughout the year, helping small business owners to sail through tax season.
5. Consistency is key: Based on a company’s tax bracket, small business owners can determine the amount of tax a company should be paying on a monthly basis. By making consistent monthly deposits of that amount into a savings account designated specifically for taxes, owners can ensure their final tax bill will be covered at year-end.
6. Invest the savings, reap the rewards!: The savings contributed to the above-recommended account can be put into low-risk investments, earning interest throughout the course of the year.
7. Credit crunch? Use a card: The IRS now accepts credit card payments, so for businesses faced with more taxes than they prepared for, the difference can be put on credit and paid off in installments like a monthly bill. This debt will accumulate interest, and is therefore best used as a last resort, but is still preferable to incurring late fees or a possible audit.
Should you choose to go this route, make it work to your advantage as much as possible: Use a low-interest credit card, or negotiate a better rate with your card company. If possible, find a card with a great rewards program as well; air mile rewards or cash-back features can be put back into the business, off-setting some of the money lost to interest. Also, for business accounts, the interest can be written off.
Guest author: Pat McCaully