Tax Planning
Business owners who haven’t been in the game long often make the mistake of thinking taxes only need to be done once a year or that extensive preparation is only for businesses with more than a moderate income. In reality, there's plenty of tax prep filers can do year-round to limit their liability and ensure a profitable year.
As taxpayers, business owners should never wait for an audit to force them to understand their own tax situation.
Here are some of the things you should always consider doing.
Ensuring you have a separate bank account and credit card for company expenses is one of the first things you should do as a business owner. However, just having a company card won’t be enough to conquer tax preparedness.
Staying on top of your expenses after creating a separate bank account and getting a company credit card is essential. Avoid using personal accounts and cards to pay for business expenses, whether you’re talking about client lunches, business equipment, or other business costs.
The same goes for using a company card to pay for your groceries, gifts, and other expenses.
Why is this separation important?
Inaccurate recordkeeping can lead to erroneous tax deductions. This can put you and your company at risk during an audit. You can incur fines in addition to having to pay more taxes.
Furthermore, mixing business with pleasure when it comes to expenses will muddy self-employment accounting and make compiling paperwork more challenging.
There is no purchase that doesn't come with a receipt. Even though we're slowly transitioning into a paperless workplace, plenty of receipts still come in physical form.
But there’s a major problem with receipts. Small pieces of paper you receive in-person are easily lost, misplaced, or ruined. This can be troublesome as you enter tax season.
Say you want to deduct certain expenses to lower your taxable income. An accountant can't approve those deductions if you can't back them up. Receipts help you back up your claims by providing evidence of when you bought you something, how much you paid for it, and what it was for.
Even small businesses manage tons of receipts every year. Therefore, keeping them safe is crucial for deducting expenses and increasing your company's net profit.
Not having the right receipts can also land you in trouble with the IRS during an audit.
Unproven expenses won't be deducted, and you might have to pay some fines on top of the inaccurate tax return filing.
Digitizing receipts is great for online tax preparation because it ensures you never lose them, given the various safe ways of storing them digitally or on the cloud. Moreover, you can do away with some of the clutter and find critical documents faster when you need them when e-filing.
Understanding your tax obligations doesn’t just leave you in good standing with the IRS. It also leads to better financial and business decisions.
If you know how much money you have to pay in taxes, you'll know the type of investments you can afford. Alternatively, you'll be able to look at better opportunities to spend company money on deductible expenses to reduce your taxable income even further.
One tax preparation you could be doing year-round to help with this is looking at your gross and net income numbers.
Say you sell a product or service for $150, and it costs $100 to make it. This would give you a gross income of $50.
But that's not the money you get to take home. That's called the net income, and it's the figure you get after subtracting other expenses from the gross income, including taxes.
The amount you actually take home can be considerably lower.
Staying on top of these numbers will guide you on what to do with the company's capital. It will help you understand how to cut costs, maximize margins, and even reduce your taxable income.
Hiring a team means you'll have to pay salaries. But this also means you have to deal with payroll taxes.
In most cases, payroll taxes are held by employers on behalf of the government. Then, it's the employer's responsibility to remit the money owed during tax season.
This can be a lot of pressure and unnecessary stress for a business owner.
If you're running a small business, hiring a third-party payroll management company could be a good idea. Even medium-sized companies do this rather than manage an in-house payroll department.
A payroll service can ensure your accounts are in order by monitoring your monthly activities. You can get timely notifications on when to make adjustments, and you’ll get accurate reports to share with your accountant.
Tax law is nothing to take lightly. Some business owners overcomplicate things when doing individual tax preparation and taking everything on themselves, maybe leverage free tax preparation tips or help. Others might dump these responsibilities on a team member at the end of a tax year.
Some will do the right thing and hire tax professionals such as accountants or bookkeepers. But even doing this doesn't ensure you'll be ready come tax season.
Understand that not all IRS-certified tax pros are interchangeable. They all have areas of expertise and working with someone who doesn't understand your business and industry can be problematic.
You might not get good business advice. Your tax returns might not be optimized to maximize deductions and increase profitability.
These are things you'll want to avoid.
If you find that you’ve hired the wrong person or service for the job, should you stick it out or find someone better?
The answer is to always find someone better. There's no reason you can't terminate a partnership to enter a better one, even if it's in your second or third quarter.
Tax preparation services that understand your tax situation will make sense of past tax filings and financial records. They might be able to fix mistakes in time and turn your business around financially.
Don't be complacent or try to tough out an unfortunate collaboration. Even changing your accountant until you find the right fit can be the type of tax preparation you can be doing year-round.
Ensuring you have the best accountant and bookkeeper for your business is a small part of a year-round tax preparation strategy.
Once you have your ideal partners, it's time to seek their advice. You shouldn’t wait until the end of the year to look at your tax returns and decide what to do next.
A good accountant, bookkeeper, or CPA can give you valuable guidance on business tax law. They can extrapolate key information from your numbers and offer suggestions on how to grow the business.
They might steer you towards more profitable assets. They can identify deductions you could benefit from and how to save money by improving margins.
Say you want to take out a bonus. Your accountant should be able to tell you if that's a good idea. Maybe you need to make other moves in your business before rewarding yourself with a bonus or extra compensation.
Remember that running a business is an ongoing process. You'll make many financial decisions throughout the year, and most of them will impact your tax returns.
It's crucial to have accurate information when making those decisions. So, don't underestimate the value of constant communication with financial advisors.
Not all businesses have to pay quarterly estimated taxes, but it’s something to consider no matter what.
Many small business owners fear quarterly payments. Why? They’re more likely to struggle with cash flow. Thus, paying consistently instead of gathering cash for a lump sum payment can seem scary.
What if something happens next month and you don't have enough to pay a supplier? What if your estimated quarterly tax was too high, you didn't earn enough, and you ran into other issues?
The reality is less scary. First, you might not have to make the payments at all. Secondly, if you're not in a strong financial position, you shouldn't.
But here's where things get interesting. If your business can sustain positive cash flow and pay estimated quarterly taxes, you'll be better off at tax season.
Remember that the government doesn't care about your poor financial decisions. If you owe money and your actions mean your company can’t pay the IRS what it is owed, you can land in trouble.
Imagine doing well financially, the forecasts lift your spirits, and you decide to go on a spending spree. After all, you have money to spend and you think everything will be fine.
Suddenly — and this happens a lot in seasonal businesses — you hit a slump. You're not making enough sales, and you’ve spent money you won't make back.
You won't have the government's money when quarterly tax season comes around. Your reporting might also get murky, and you'll have to pay more as the missed deadline means the interest compounds.
Making quarterly payments ensures you take care of at least part of your financial obligations, minimizing your liability.
In this business environment, companies that don't leverage technology get left behind. Lagging behind in tech makes competing for market share difficult.
But technology is used for everything. Even if you don't rely on it to produce or deliver products and services, you still need reliable tech to monitor key business areas.
Every small business should have the best technology — whether physical equipment or software — that it can afford.
If you're using expense-tracking software, make sure that it's doing a good job. If it doesn't perform well year-round, you'll complicate your accounting come tax season.
The same thing applies to monitoring your receipts, payroll, key performance indicators, and financial metrics. This is especially important to keep in mind when dealing with tax preparation software. One out-of-date piece of software could have you inadvertently making mistakes on state tax, federal tax, or miscellaneous tax forms.
Automation is almost mandatory to grow a sustainable, successful business. But not all software is equal. It's your job as a business owner and leader to be informed of the best tech solutions for your company.
When something is underperforming, switch it out to avoid bigger issues down the road.
Thanks to the pandemic, home offices have become the norm for many workers and even small businesses. But not all small business owners take the concept of a home office into account. It's somewhat understandable given the murky tax regulations surrounding eligibility over the years.
However, the IRS makes it easy to calculate home office deductions for tax return preparation these days. After you do it once, you'll realize how simple it is.
Although there are limits to what you can write off and how much you can deduct, every little deduction adds up.
Work with your accountant to spot missed business deductions, and don't forget to include your home office.
If you want to know where your company stands, you have to look at current figures. However, if you want to see its progression, looking at past tax returns is a solid approach.
You can identify changes you might have to make to increase business performance. You can spot irregularities in the reporting that could be due to using inadequate software, an inexperienced accountant, not separating business and personal expenses, etc.
You can do this monthly, quarterly, or year-round to consistently improve your business and set your company up for a more profitable tax season.
The earlier you prepare for tax season, the easier it will be to compile everything from an income tax return to state returns, maximize deductions, reduce your taxable income, increase profits, and file the paperwork on time.
Stay on top of your financial situation, hire the right advisors, and perform consistent company reviews.
Much of the information you'll use to file a tax return is the same information that will enable you to make better business decisions.
If this is an area you need more help with, Swyft Books can offer real-time, year-round assistance. Let's put your company in a position to sustainably grow. Sign up for a free trial today!