7 Best Practices To Prepare Your Business For Tax TimePublished:
You may barely be over the winter holidays, but tax season is fast approaching with the ferocity of a winter storm. If you are like the vast majority of taxpayers, you are most likely panicking as April gets closer. This would be a justified reaction considering the fact that even the most savvy business owners are scrambling to complete a seemingly endless list of tasks necessary to file their annual tax return. There is no need worry though, especially if you have a comprehensive plan to get your tax tasks in order. Here is a simple 7-step guide to help you get organized this tax season so that your filing will be a snap.
1) Mark Important Tax Dates On Your Calendar
Although it may sometimes seem like the government is out to get you, this is most assuredly not the case. Tax deadlines are released early for a reason, to help tax payers plan accordingly and avoid expensive penalties.
This year, taxes are due on April 15. Additionally, some business owners also need to complete more documents that are usually due before that date.
Here are some of the most critical deadlines to add to your calendar:
• January 31: Forms 1099 and W2 Postmarked and sent to IRS and employees.
This means that if you paid more than $600 to an independent contractor or employee in 2018, you need to provide them with a 1099 or W2 on or before this date.
• March 15: Partnership Returns Due
This earlier drop date gives business partners the opportunity to receive Schedule K-1’s before their personal tax returns are due.
• April 15: is the deadline to file corporate tax returns (forms 1120 and 1120S), or apply for a tax extension.
• April 15: Individual tax returns are due or you can apply for a tax extension by this date.
2) Make Sure Bookkeeping is Updated
Keeping your books up-to-date is an essential part of filing taxes for a small business. This step allows for the most accurate and efficient view of the income and expenses for your business. If information in your company books is not correct, you could make a major mistake when submitting your documents to the IRS. Keeping this things updated and organized also helps make things easier in the event that you get audited.
Online accounting software is a great tool to process bookkeeping for your business. Alternatively, there are a lot of helpful professional who can assist you if you would like to hire a bookkeeper. Experts recommend that you choose a method that suits your company best without exceeding the time you have set aside for bookkeeping or managing your business budget.
3) Organize Your Receipts
If you are still living with the hassle paper receipts, it’s time to update your processes and go paperless. Eliminating paper receipts saves you from mountains of paperwork and helps you get a bit more organized. If you are still using paper receipts, try to keep them all in one location that is water proof and organized.
If you choose to switch to a paperless option, upload and scan receipts, business cards, and other important documents as soon as you get them. Taking photos of the receipts and storing them on the ICloud can also be a helpful tool.
4) Make Sure You Are Up-To-Date On Current Tax Requirements
Considering the ever-changing complexity of tax law, even the most knowledgeable of small business owners can quickly get confused when the latest round of tax modifications is released each year. If you have no clue, there is no shame in speaking with an accountant to help clarify and understand what you need for your business.
Sales tax can be one example of a complex area that you may need professional assistance with. For the most part, businesses are legally required to collect sales tax in a locations where their company is conducting business or making sales. However, since tax laws usually vary from state to state, consider consulting with a tax professional to ask questions and be sure you are in compliance with your local state sales tax laws.
And finally, if you paid an independent contractor more than $600 during the tax year, be sure you are up-to-date on the requirements for submitting forms and filing paperwork for these workers. Per this year’s requirements, your 1099 forms should be mailed to your contractors in a timely fashion according to the above dates. If you have regular employees, you will also need to make sure that the W-2’s have been mailed out in a timely manner for these as well.
5) Consider Tax Extension Options
Although tax extensions do not relieve your tax due, they can relieve the pressure of paying all that is owed at the regular tax deadline. If you have concerns about your ability to pay what you owe, experts recommend you consider filing paperwork for an extension. An extension will give you more time to file your tax return without significant late penalties. Moreover, as long as tax payers file their paperwork before the proper deadlines, the extension will be automatic and the IRS will only contact you if your application is denied.
If you are considering filing for a tax extension, simply fill out the tax extension form that is right for the type of business you own. You will need an estimate for the amount of money you owe based upon your paperwork and the money involved with your business. Next, submit your completed forms electronically or through the mail on or before the proper due date for filings.
It is also important to consider the penalties and interest that you may owe if you miss deadlines, even if you submit your extension paperwork in a timely manner.
6) Educate Yourself About Common Tax Deductions
Tax deductions can be confusing, but fortunately there are lots of online resources to help clear up the grey areas. Here are some common deductions available for businesses. Please note that most or all of these should be deducted on a Schedule C, Form 1040.
a. Independent Contractor Expenses
Regular employee expenses are a typical part of conducting a business and cannot usually be deducted. However, expenses related to paying for an independent contractor can usually be deducted from business taxes.
b. Home Office Fees
Most business owners have space in their homes that they use to do work when not in their official office. And with home businesses becoming more and more popular, more business owners than ever are conducting business from a home office.
To qualify for a deduction for the cost of doing business at home, it is necessary to meet three basic requirements:
Exclusive Use: the area you work in should be used for primarily for your business and not other tasks or hobbies.
Use With Regularity: Your home office space should be used daily or on a regular basis with consistency.
Majority Use: You may have other places where you conduct business, but you should spend most of your work time in your home office. The most critical business duties should also be conducted there.
The best way to calculate home office deductions, is to use one of two suggested methods. The first method allows for a standard deduction of $5 a square foot. This involves measuring the square footage of your home and determining how much of that space is used for business. Be aware that the maximum deduction is 300 square feet for any one home office.
The second most common method requires calculating the actual percentage of your home that’s used for business. You would then divide the area of your home used for business by the total area or square footage of your home.
c. Shipping Costs
Be sure to keep track of your shipping costs too. The expenses related to sending goods to your customers (postage and packaging), can often be claimed as “other business expenses” to deduct.
d. Phone Or Internet Expenses
You may also want to consider deduction some of the money you pay for phone expenses if your phone is used for business purposes. The regulations require that you use your phone only for your business in order to deduct the entire cost of your phone plan. However, if you happen to use your phone for business and personal use combined, you will need to calculate the percentage of the total cost of the phone bill that is used for business use and only deduct that amount.
For example, using your cell phone 60% for business duties, and 40% for personal use, would allow you to deduct 60% of costs associated with your cell phone. Just be sure to keep an itemized phone bill so that you can back up your claims if you happen to get audited.
Additionally, services like Skype or Google Voice can also be deducted as office expenses if you pay for these services and use them for your business operations.
Another potential deduction is for the cost of your internet bill. Much like cell phone usage, you will need to separate the time you use for personal use and deduct that from the expenses you plan to claim.
e. Website-Related Bills
Domain registration and web hosting costs can also be deductible under the category of “other expenses”. Keep track of software and marketing expenses as well, as they can also be deducted from business taxes.
f. The Cost Of Vehicle Use
To deduct the cost of business use of your vehicle, users will need to track exact mileage that was used for business excursions. This can be tricky if you use your car for personal use as well. Try keeping a notebook in the car and recording business use at it happens. It’s much easier to keep track of mileage as you go than to try and guess your mileage at the end of the year.
Once you have recorded the total mileage you have driven for business purposed, simply divide that number by the total miles you have driven, to figure out the percentage of miles you have driven for business and the percentage you have driven for other or personal use.
g. Fees Related To Equipment For Your Business
Smart business owners can also deduct the cost of business equipment from their taxes. Expenses like a new business computer, a camera, or a new cell phone can usually be deducted from businesses related taxes. The items cannot be rented or leased and receipts should be kept on file just in case.
If you would like to use these expenses on your business taxes, you should be aware that using these expenses can be tricky when depreciation of the items comes into play. You should be sure to keep accurate records of all business equipment purchases and ask your tax professional to advise you on the best way to deduct them on your business tax return.
h. Educational Costs
Educational costs are one of the most frequently overlooked deductions. Be sure you consider and include any classes or workshops that you took in 2018. The only requirement is that the proper documentation is collected and the educational events either add value to your business or increase your business expertise.
i. Professional Services
If you paid for legal or professional services in 2018, you could be in luck. Business owners can usually deduct these kinds of expenses, so long as they are “necessary and directly related to running your business”. So keep careful track of the money you are charged by accountants and bookkeepers, so that you can claim these as tax deductions for professional services.
7) Don’t Be Afraid To Get Professional Help
You might be resistant to the idea of hiring professional help for a variety of reasons. You may think you can’t afford professional tax help on a tight business budget. Regardless of your past decisions during tax season, you may want to reconsider professional assistance for your business taxes this year.
A knowledgeable and experienced tax company can usually complete your taxes in a shorter period of time and offer helpful suggestions on how to pay less this season and next. When you are looking for a professional to help your company file taxes, you will want to consider how well they understand your particular industry, your specific business needs, and how the tax preparation company bills you for their services (hourly or per project).
Taxes are rarely if ever a favorite part of business operations, but with efficient planning and proper organization this year, smart business owners can maximize deductions and remove most of the stress from tax season.