How Small Businesses Can Navigate Tax Season With Ease
If you’re like a lot of small-business owners, you’re still recovering from the stress and chaos of tax season. If you gathered documents at the last minute or received a bigger bill than you expected, you were probably as much a victim of your lack of preparation as you were of the IRS.
There’s a better way to handle your small-business taxes. It involves a mix of common sense, solid year-round financial planning, professional tax prep, simple document tracking, and staying on top of the latest changes in the tax code.
Here are eight easy tips for small businesses to navigate tax season with ease.
1. Use a professional
Americans have a pretty pessimistic economic outlook in 2024, even though the economy is actually improving. As a result, many business owners are trying to pare back their expenses. One of the first services to go is often the tax accountant because many small-business owners think they can do their business taxes themselves.
This might be true, but it doesn’t mean it’s a great idea. Having a professional handle your tax prep is actually one of the most valuable professional services that a small business can buy. A good tax pro will not only prepare your taxes at tax time, but he or she can also help you get your paperwork in order year-round and make sure you’re using proper accounting practices.
Even if you have some kind of professional expertise that would enable you to handle your business taxes yourself, you need to consider if the time you’d spend on your taxes would be better spent on the core functions of your business.
2. Don’t wait until the last minute
Doing your taxes isn’t something you do once a year. It’s a year-round concern. You should be tracking all your expenses, receipts, and financial documents throughout the year, as well as actively carrying out tax-planning strategies. Do this right, and you’ll be able to navigate tax season without all the stress.
On the other hand, if you let bad spending habits from your personal life spill over into how you run your business, you’re setting yourself up for a rough tax season. Gathering and organizing all your invoices and receipts is a frustrating and time-consuming process, and it’s inevitable that you’re going to cost yourself money by losing out on key tax deductions.
3. Use last year’s blueprint
If this is your first year as a small business, you’re going to essentially start from scratch at tax time. In subsequent years, though, you can use that strategy as a blueprint if it worked well. Get the same documents together, and then ask yourself — or your tax accountant — what’s changed and then go get those documents. Rather than starting at zero every year, this is an easy way to cover the basics and can save you a lot of hours.
4. Keep your team in the loop
If you’re serious about tax planning, you should check in with your tax accountant once a quarter. This has a variety of benefits. One, it will force you to put together a preliminary financial statement that will include your profits and losses, as well as your main expenses. This gives you and your tax pro a snapshot of your business and is a great opportunity for course corrections. Some small businesses even prefer to handle their bookkeeping on a quarterly basis, so you’ll reconcile your books four times a year.
Second, it gives your tax accountant a preview of what they’ll be handling at tax time. This is especially important if you’re expanding or if your major assets are changing.
Third, it’s a chance to talk about your current tax strategies, such as the deductions you’re targeting and if they’re compatible with the trajectory of your business goals. Touching base throughout the year is the best way to avoid getting hit with unpleasant surprises at tax time.
5. Don’t overlook obscure credits and obligations
The tax code changes constantly, so make sure you and your tax pro are on top of the latest changes that affect your small business.
For example, you could be eligible for lucrative tax credits related to energy efficiency or hiring. Make sure you’re exploring these possibilities.
Another area of recent change is the use of remote workers. If you have remote employees, you’ll need to make sure you’re in compliance with all the state and federal tax obligations related to them, which can often be counterintuitive.
6. Send your invoices
Outstanding payments can be frustrating, especially if you get hit with a big tax bill. Try to collect your unpaid invoices ahead of tax time so you can wrap up all the loose ends from the previous tax year. Consider using accounting software that sends automatic payment requests so you don’t have to spend your time chasing down payments.
7. Use separate accounts
Maintain strict separation between your business and personal accounts throughout the year. Put your business expenses on your dedicated business credit card or checking account only, and never use those accounts for your personal expenses.
This will make your accounting much easier because your expenses will already be separated. It also sends the right message to the IRS, which might be assessing whether your business is run for profit or as a hobby — a distinction that can have profound implications on your business’ tax status.
8. Set aside a surplus or open a line of credit
Part of tax planning is planning how to pay your taxes. The reality is that no matter how carefully you conduct your bookkeeping, you could be in for a surprise at tax time. Experts suggest setting aside at least 10% more than you think you’ll need for taxes in case you’re hit with an unexpectedly high tax bill.
If there’s any doubt about having sufficient cash on hand at tax time, open a business line of credit ahead of time. This way, your tax bill won’t adversely affect your cash flow, and you’ll have access to money that you can use to pay your taxes or for other business expenses.
Featured Image by Kelly Sikkema on Unsplash
The post How Small Businesses Can Navigate Tax Season With Ease appeared first on noupe.
