The tax filing deadline has come and gone. With yet another tax season in the books, now is a perfect time to reflect and position yourself better for a successful season next year.
Let’s face it: Small business owners aren’t expected to be tax experts. After all, your focus is on your business and doing the work you love. But if you avoid dealing with taxes until tax time, those months can be unbearable—a time of panic and stress while you scramble to gather receipts and records. Even if you hand your annual tax duties to an accountant, there’s still work to be done. That said, treat your taxes like any other business practice: An ongoing process that needs your attention throughout the year. Here are a few tips to get you started.
Toss the Shoebox, Find a Better Way to Log Expenses
Are you the shoebox receipt collector? Better yet, does your accountant cringe when you drop the box off at their office? The shoebox method is a highly inefficient way to manage your expenses, and it makes tax time even more stressful. Don’t wait until the last minute to add up expenses. Keep close track of them throughout the year. Logging them as you go is more accurate and saves you time in the long run. Chances are, it will be easier for you to find 10 or 15 minutes a week to deal with taxes instead of spending hours or days dealing with them in March or April.
Separate Your Business and Personal Finances
Do you have a separate checking account and credit card for your business? You should, no matter the size. Maintaining separate accounts makes tracking business income and expenses much easier. It’s also a good precautionary for protecting your business from being reclassified to a hobby by the IRS.
Automate your Accounting Process
If you haven’t already, it’s time to bring your business into the 21st century. Accounting and invoicing software, like FreshBooks, can be instrumental in driving efficiency and accuracy all year round. Modern accounting software can connect to your bank account, automatically sync transactions and even categorize expenses for you. This saves you time and ensures you won’t miss any deductions at tax time.
Protip: To continue to encourage a more streamlined process for your entire business, consider downloading an app to track your business miles. To take a deduction for business use of a vehicle, the IRS requires a contemporaneous mileage log. Estimates just won’t hold up in an audit, so benefit from one of the excellent apps available to track your mileage and save yourself from trying to recreate a year’s worth of driving using a calendar and Google maps next tax season.
Back Up Your Electronic Records
Today, many options exist that allow you to easily and inexpensively store your data in the cloud. If you’re still storing electronic documents on your hard drive or a local server, what would happen in the event of a disaster? Get in the habit of backing up your files to a cloud or a remote location. It’s especially important to maintain the backups of information used to prepare your tax return. The IRS won’t go easy on you just because your records are missing. Have a contingency plan in place, just in case.
Accounting and invoicing software, like FreshBooks, can be instrumental in driving efficiency and accuracy all year round.
Work with an Accountant
Many small business owners try to muddle through tax preparation on their own. Some actually enjoy it! Going the DIY route is fine if you take pleasure in the process. But if you dislike bookkeeping and taxes, and thus put them off like your most dreaded chore, you could be doing you and your business a huge disservice. An accountant with industry expertise can provide sound advice and help you plan properly for tax season.
Protip: Give your accountant access to your cloud-based accounting software. This access to real-time data can help them give you better advice throughout the year.
Make the Most of Your Deductions
Did you know that tax laws aren’t just rules to be followed? In many cases, they’re designed to incentivize certain behaviors. You can use these to your advantage if you know what they are.
For instance, did you know that you can deduct up to $5,000 of startup expenses in your first year of operations? Are you aware of the tax credit for research and development activities? Are you taking advantage of the tax benefits for contributing to a retirement plan? Are you deducting home office expenses? You may be able to purchase new equipment and write off the entire cost in the year you buy it. Every business is eligible for different tax breaks, yet many of them are still overlooked. So ask your accountant about potential tax breaks that apply to your business.
Make Estimated Payment
If you work with an accountant, they can help you estimate your tax liability and make quarterly estimated payments. Whether you get professional help or handle it yourself, making estimated tax payments is crucial. For one, it can help you avoid a big tax bill and ease your cash flow. For another, it’s required. The U.S. tax system is a “pay as you go” system, meaning individuals and businesses are required to pay estimated taxes as income is earned. If you fail to pay enough, you could get hit with underpayment penalties at year-end.
If you’re not sure where to start, consider setting up a separate savings account specifically for taxes. Each month, transfer 25% of your net profits from the business to that account, then cut a check to the IRS quarterly (on April 15th, June 15th, October 15th, and January 15th) or make a payment online using the IRS’s Direct Pay service.
Your actual tax liability will depend on a lot of factors, including your business structure and eligibility for other deductions and credits. Talk to your tax professional to get a more accurate estimate, but 25% is a good rule of thumb for many businesses just starting out.
Finally, File Your Taxes on Time
No matter your business, you probably manage deadlines, appointments, due dates, targets and everything in between. If you can’t seem to file your return on time, start thinking about the tax filing deadline like you would any other deadline in your business: non-negotiable.
When you fail to file your return on time, in addition to paying any taxes you owe and paying interest on the past-due balance, you’ll be penalized for failing to file and pay on time. Those penalties can add up fast, making paying Uncle Sam even more of a burden than it already is.
As we coast into summer, tax season seems far away, but it will be here before you know it. Take the necessary steps now to organize your records properly. Spending some time now will make next tax season a breeze and help you gain a better understanding of taxes. That just makes good business sense for any small business owner.
about the author
Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm. She’s passionate about helping people make sense of complicated tax and accounting topics. Her work has appeared in Business Insider, Forbes, and The New York Times, and on LendingTree, Credit Karma, and Discover, among others. You can learn more about her work at jberryjohnson.com.