While you started 2017 with the best of intentions to keep your financial records organized, you may find yourself scrambling to find receipts and other documentation to prepare your tax returns. All too often, it is accounts receivable that presents the greatest challenge.
More than 70 percent of small businesses outsource their tax preparation, according to the 2015 Small Business Accounting Report. Outsourcing does not eliminate the need to plan in advance. Here are six tips to help small business owners prepare for tax season.
Carefully Track All Your Business Expenses
This might sound like a no-brainer, but everyone gets busy, and despite good intentions, recordkeeping can lag. If you have lost one or more of your receipts, or they have become unreadable, don’t panic. You can still file your return. The IRS accepts the following records as proof of expenditures: bank statements, canceled checks and pay stubs. When you incur the qualified expense by credit card, the IRS requires a statement that shows the transaction date, the payee’s name and the amount you paid.
Remember, it’s always a good idea to enter your expenses, from entertainment and mileage to business trips and meals, into your accounting system as you go. Mobile apps are also available to make the process easier and accessible at the time the transaction occurs. A good business practice is to include detailed notation, such as business purpose and attendees, to support your expenses with documentation should you be audited.
Use Accounting Software
Has your business missed deadlines and even faced penalties because you lack the time for proper reporting? Effective accounting software will help you track your accounts, expenses and payroll. According to the Small Business Accounting Report, QuickBooks remains the most popular software, especially with its Self-Employed offering, but many other effective software programs exist. CPAs can assist small business owners in selecting the appropriate accounting and recordkeeping systems that best fit their needs.
Deferring income into next year or accelerating expenses into this year can lower your tax bill. A business that uses the cash method can hold off submitting invoices, while a business using the accrual method needs to delay shipping their products or providing services.
Accelerating expenses by, for instance, buying new computer equipment or stocking up on office supplies can also lower the current
year’s tax bill—although the equipment must still be placed in service before the end of the year.
Deferring income or accelerating expenses only makes sense if a company’s tax rate is projected to be the same or higher, in the coming year.
Fund a Qualified Retirement Plan
If you are fortunate enough to have extra money in the bank, consider creating and funding a qualified retirement plan for you and your employees. If you only have a few or no employees, a Simplified Employee Pension (SEP) plan is optimal. With a SEP, you make 100 percent of the contributions. If you have more employees, SIMPLE IRA plans or 401(k) plans are great options. The costs associated with creating and administering the fund are typically tax-deductible.
Take Advantage of Tax Incentive Programs
Has your business introduced or improved a new product or process? If so, it may qualify for valuable research and development (R&D) tax credits. Businesses with less than $5 million in annual revenue can take the tax credit up to $250,000 against their payroll taxes,
assuming they have employees engaged in R&D for five years. Be sure to check your state’s tax incentive programs.
Work with a Qualified CPA
Using a software program is a great start to getting your records in order. A CPA with expertise in working with small business clients can help ensure you are taking advantage of every tax incentive and deduction, as well as keep you in compliance with the latest rules and regulations. You will also have the added assurance of knowing your taxes are prepared accurately and on time to avoid late filing penalties.
Keeping in contact with your CPA year-round allows for a smoother and more accurate income tax return process. And when your CPA is involved in your business throughout the year, she or he is better able to identify and implement income tax strategies beneficial to your business.
You don’t want to pay more in taxes than you have to, so plan ahead—don’t wait until tax time. For even the most careful business owner, tax season can be a nightmare. If you follow these tips, it doesn’t have to be.