Small business taxes can be a tedious burden or an effortless exercise. The key to this transformation is putting the right strategies in place. Here are three.
Mind the Recordkeeping Details
A precise process for recording business expenses is essential to maintaining accurate tax deductions. Having an organized system ensures that bookkeeping is continuously accurate.
For example, income tax reporting necessitates classifying all ordinary and necessary business expenses in specific categories. To achieve this, a checking account and credit card dedicated exclusively to business purchases are crucial. Resist using these for personal expenditures. That creates a bookkeeping mess to clean up at tax time. Take recurring draws from the business account to a distinctive personal account for your non-business spending.
Check stubs or memo lines on check images should convey the appropriate business expense category for immediate recording of the correct bookkeeping category. If you happen to spend personal cash for a business expense, account for these immediately before losing track of the transaction or its categorical purpose.
Additionally, maintain a mileage log for business travel with your personal vehicle. The business may reimburse you for some vehicle expenses. Do not have the business pay for all your personal automobile expenses and expect this to qualify as a business tax deduction.
Put the Right People on Your Team
A qualified bookkeeper will ensure that you have complete records throughout the year. This professional should examine financial statements at least monthly to clarify any uncertainties. Then, at tax season, your books will be ready on time for your tax accountant. This has the added benefit of allowing an analytical review of expenditures to determine areas where you can reduce costs to improve profit.
Avoid the temptation to handle reporting of business taxes yourself. Income tax rules change and the logic applied to some expense categories does not apply for tax purposes. For example, the cost of fixed assets is generally deducted as depreciation over several years, but is not required in all instances. Don’t jeopardize valuable deductions by failing to rely on professional tax preparation for your business.
Be Proactive with Payments
Having an organized bookkeeping system and valuable people on your accounting team are only part of the commitment to streamlining small business taxes. The final element in the design is your resolve for proactive tax-related action. Never miss a tax filing deadline. Late-payment penalties are harsh, and late-filing penalties are even more severe. Remember, filing an extension for submitting a tax return does not extend the due date for paying your taxes owed.
Last, the amount of taxes should not come as a surprise. Your tax accountant can estimate the expected tax on your business profit when you keep accurate records throughout the year. A minimum amount of tax should be remitted during the year to avoid a penalty for underpayment of estimated tax. Even if you file your tax return and pay taxes by the due date, failure to remit estimated tax payments will trigger a needless penalty.
Your bookkeeper and tax accountant can help you avoid neglecting this important issue.