Getting Your Business Ready for Tax Season

No one looks forward to tax season. For most businesses, tax season can feel chaotic since it involves scrambling to find specific documents, such as financial business reports, previous tax returns, and various records and data. Then comes the hassle of filling out the necessary IRS forms, trying to meet the deadlines, and hoping beyond hope that you don’t get audited. All this is on top of still trying to run your business. However, you can take some of the stress out of tax season this year with just a little bit of forethought and preparation.

Get Your Bookkeeping Squared Away

It starts with updating your bookkeeping. Most bookkeeping consist of things like managing payrolls, preparing financial statements, and recording your financial transactions. Messing up your taxes because you missed reporting something due to poor record keeping or made an error is frustrating, expensive, and easily avoidable.

 

Keep a general ledger that you categorize for the various recordings of your business. You can either do this by hand, or realistically spreadsheet, if you trust yourself to be able to keep track of all of it. Otherwise, you can find a program that will help you. Bookkeeping software such as Quickbooks, Freshbill, or ZohoBooks are designed to help companies, especially small businesses, with their bookkeeping. It is important to note, however, that bookkeeping software is not the same as accounting software. Bookkeeping software fulfills the purpose of recording your financial transactions. Accounting software is meant to provide an overview of how your business is doing financially. We can go over different examples of accounting software later in the article.

 

You should keep this ledger as accurate and as consistent as possible. For example, if you are paying a tax services company, like Right Choice Insurance and Taxes Inc., to help you with your tax planning or insurance, don’t record it as an investment one month and then as a marketing expense the next. Also be sure to understand what is considered deductible and what is not. For small businesses, something like lunch can’t be counted as a business expense unless it serves a business purpose (such as meeting with a client, traveling for business purposes, etc.).

Keep Your Books Balanced

Most businesses use double-entry accounting. If that is what you are doing, make sure to keep your books balanced. The sum of all of your credits in one log should equal the sum of all of your debts in the other. If you are using software for accounting, like Xero or QuickBooks, this part should be done automatically. However, if you are using a spreadsheet like Excel, you will need to ensure your data is entering correctly. It might even be best to double-check your ledgers, software or not.

 

Many small businesses end up being required to pay estimated taxes when it looks like they’ll end up owing over $1000 in federal income tax that year. Making a mistake on payments like this can be costly, so it’s better to be as accurate as possible. Bookkeeping or accounting software can help here, as invoices are provided from the data collected to give you a more accurate picture of where your business is at, or to tell you how much you owe.

 

There are several sorts of accounting software companies out there, some of the best provided by the same companies that make bookkeeping software, such as ZohoBooks or Bill.com. There are also several sorts of accounting software in general, each serving different purposes. You can choose programs that manage your employee payrolls, bills, or invoices. Choosing any software though means you’re saving on time and reducing the human error that could cost you.

Don’t Mix Business with Personal

Keep your business and personal expenses separate. If you don’t, you are setting yourself up for headaches come tax time, and possibly an audit over both sorts of expenditures in the future. It takes more time and energy to have to sit down and separate business expenses from personal ones when they are mixed into one bank account than it does if the accounts were separate to begin with.

 

In fact, having a separate bank account might only be the start. If you use the same accounting and bookkeeping programs for your personal and business expenses, it would be better to keep those separate as well.

 

Mixing personal and business accounts means that you are inevitably going to miss taxable deductions and will likely end up paying more in taxes. The sooner you are able to separate your business and personal accounts, the easier tax season will be.

Keep Track of Your Records

The IRS generally requires that you keep a record of all of your business records for at least three years. There are exceptions to this, especially when you get into the more specific documents as some could range from four to six years. Generally however, it’s recommended you keep your records for three years, as that is how long the Period of Limitations lasts - the period of time where you can make changes to your tax return or the IRS can try to audit you. This would include invoices, receipts, bank statements, payroll records, and a record of anything that could prove income, deduction, or credit that could end up on your tax return. If you feel overwhelmed by the task of keeping track of all the paperwork you could acquire in three years, it may be time to go paperless.  Going paperless can save you time and energy by digitizing your records and making them easily searchable on your computer.

 

This can be easily done going through the same software companies mentioned above, but it’s important to find what system or methods work for you.

 

Tax time is no fun for anyone, but it is a required part of doing business. You can take some of the frustration out of doing your business taxes by preparing ahead of time. This mostly involves getting into good habits like simply keeping track of important information and making sure it’s where it needs to be. Otherwise, investing in software you trust to help you keep track of the data you’ll need come tax time, or worse, an audit. Doing things right the first time can save you a lot of headaches later on, and a lot of time since you want have to go back and correct anything.

About the author

Kara Masterson is a freelance writer from West Jordan, Utah. She graduated from the University of Utah and enjoys writing about business and finance and spending time with her dog, Max. Information credited to Fone Angels, smart phone and tablet repairs.

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.
CAPTCHA
This question is for preventing automated spam submissions.