Tax season may not feel close but it will be here before we know it. Brush up on your small business tax preparation process and check out this checklist to see what you can’t afford to ignore in 2019.
Did you know that failure to file your business taxes could lead to a penalty of 5% of your unpaid taxes?
If you fail to pay tax by the set deadline, you could face a penalty of 0.5% of the tax owed. Shocking, right?
You could face more penalties if you do things wrong during the tax season. But how can a small business owner like you avoid them?
The answer is simple: prepare well and avoid mistakes when filing tax. You also need to arm yourself with useful information that can help you to minimize your tax burden.
How do you prepare?
Here are six tips that can help you brush up on your small business tax preparation process.
Organize Your Records
To ensure your small business ends the year fiscally healthy, you need to have valid and well-organized records for all income and expenses.
You may want to electronically scan your documents to keep them safe, reduce paperwork, and increase efficiency in your document management processes.
Also, start gathering recipients and invoices of often overlooked services and products. These may include web hosting, domain names, and cloud-based subscription services.
Take your time to review your current year bank statements, business credit card accounts, and last year’s tax returns to ensure there no forgotten expenses.
Don’t also forget to collect receipts for any paid professional services like a lawyer, paid membership dues, or business-related publications.
Ensure You Don’t Miss Any Tax Deduction
Most small business owners only know the common types of tax deductions: charitable donations, entertainment expenses, mileage expenses, meals expenses, and health insurance expense.
But did you know there are other tax deductions you can take advantage of? Here are some of them.
Under the Small Business Jobs Act, small business owners can deduct up to $10,000 of start-up expenses for investigating a potential business, or the pre-organization costs incurred before the actual business was formed.
If you’re filing as self-employed for the first time, make sure you track any startup costs you may have incurred before you launched your business.
Clients Who Don’t Pay
If you have customers who aren’t able to clear their debts, their debt may become a deductible as a bad debt.
This IRS document can help you determine whether or not your customers’ bad debts can be deducted.
Interest on Business Loans
If you get a loan for your small enterprise, you may deduct any interest the lender charges to reduce the tax burden. You can also get a deduction if you use a personal credit card or a loan to finance your business.
A word of caution, though; if you use your credit card or loan to finance your business and want to get a deduction, you should keep perfect records of how the money was spent.
If you don’t have records to prove that personal funds were used to finance your business, you could get a penalty due to improper deductions.
Payment Processing Fees
Do you use payment services that charge processing fees?
Well, we have some good news for you: these fees can also be deducted as business service expenses. This is one of the most overlooked costs you should include.
Hiring a Veteran
If you recently hired a veteran, the Work Opportunity Tax Credit (WOTC) can provide you with incentives of up to $5,600 for hiring, retaining unemployed vets, and up to $9,600 for employing veterans with service-related disabilities.
Before you include any of these tax deductions in your file, however, it’s advisable to consult your accountant. He or she will help you determine which deductions are worth your time and which ones are not.
Also, ensure that you don’t overdo or exaggerate your tax deductions. Overstating tax deductions can force the IRS to file a tax return on your behalf called SFR (Substitute for Return) –which provides no advantages.
Hire a Professional For Small Business Tax Preparation
The rules and paperwork involved in tax preparation can be confusing and challenge to an inexperienced business owner.
Don’t be afraid to ask for help from a qualified tax professional like Austin & Larson Tax Resolution. They have a team of CPAs and competent tax attorneys to handle any tax-related issues.
A tax professional will not only help with the tax filing process but also find ways of eliminating the tax penalties you might be facing.
You need to ensure the tax professional you hire has years of experience, good reputation, and rich educational background.
Classify Your Business Correctly
If you don’t classify your business correctly, you could end up overpaying taxes.
You should consult your attorney or accountant to determine if your business should be classified as an S Corporation, C Corporation, Limited Liability Company, Sole Proprietor or Single Member LLC.
Keep Your Bank Account Separate
It’s true that no business owner is 100% sure that his or her business will stand on its own when it first opens, but that is not an excuse to run your business using a personal account.
Get a business savings account and ensure all your business expenses come from the business account. This will help you avoid confusion and make it easy for you and your accountant to track income and expenses.
You should also check out the top 10 accounting and taxation myths that affect small businesses.
Make Sure the Income You Report Matches the Income Reported to the IRS
The tax man gets a copy of each of the 1099-MISC forms your company receives.
For this reason, you should ensure the income you report to IRS matches the one they know you’ve received. Not doing so is a red flag that could lead to an IRS audit.
Even if a customer doesn’t send out a 1099-MISC form, make sure you report that income to the agency.
Preparing tax files for small business can be complicated and confusing. Tax deductions may go unclaimed, tax records could get lost, and costly surprises can arise as a result.
But don’t let that intimated you; follow the tax preparation tips we’ve highlighted above. They’ll help you maximize your deductions, avoid tax season scramble, and make your small business tax preparation process smooth and successful.
You can check out our blog for more small business tips and helpful articles.