Getting Ready for Tax Season: What Small Business Owners Should KnowTake the fear out of April 15 by following these tips.
Small business is a big deal to the IRS. In 2013, it received more than 24 million tax returns from sole proprietorships alone, along with more than 1.3 billion business receipts.
Unfortunately, this doesn’t mean that your tax return is likely to get lost in the shuffle, freeing you up to wing it, shut your eyes tight and hope for the best. Small business is critical to the U.S. economy, and intense tax scrutiny comes with that territory. In a “pay now or pay later” scenario like this, it’s absolutely in your best interest to tackle your taxes early and often.
According to Genene Curry, a small business tax accountant serving the Asheville, N.C., and Atlanta areas, “Waiting until the last minute only makes things worse, especially if you’ve never been through the process before. The earlier you start, the more you have to gain in terms of protecting yourself from fines and giving yourself opportunities for deductions.”
1. Hire an accountant
As an entrepreneur, the word “splurge” may rarely, if ever, get unstuck from the back of your throat and inch its way past your lips. Any dreams of hiring a marketing guru, a Web development whiz or even a decent business card designer may be so far in the future, you can barely make out their outlines in the mist.
But an accountant? Go for it. You’ll likely recoup that investment quickly in time saved, deductions uncovered and sheer peace of mind. While finding yourself in the crosshairs of a full-on audit is unlikely, receiving a notification of possible income under-reporting isn’t. An accountant is an expert in making sure you follow all the rules and collect all needed documentation as you go, so whatever happens, you can deal with it together – quickly, confidently and easily. Surprises are eliminated.
“Small business owners tend to waste money and time trying to do their bookkeeping and taxes themselves,” Curry said. “It’s also very stressful. Even if you don’t want to pay for an accountant throughout the year, it helps to have a review at the end.”
In choosing an accountant, look for one who has experience with clients in businesses similar to yours.
2. Get organized – and stay that way – to maximize deductions
The flip side to underpaying your taxes is overpaying them. The government wants small businesses to succeed and offers plenty of tax breaks to help. You just need to implement a system for documenting your expenses so you can take full advantage.
Bookkeeping and accounting software can help. There are reasonably priced options on the market designed especially for entrepreneurs that track sales and expenses for you, help you estimate taxes more accurately and provide relevant updates to IRS rules.
Here are some examples of deductions many small businesses are eligible for but may not be taking because their records aren’t in order.
If you work at home, even part of a room can be deducted, if it’s used solely for your business. There’s just some measuring involved and some math in terms of the expense of the space relative to the expense of running your entire home.
Business supplies, from manila folders to filing cabinets to laptops, are deductible, too. Just be sure to save every receipt. Accountants who offer bookkeeping services can also help nag you about this. For furniture and electronics, you have a couple of options. You can deduct the expense in the year you buy them, or spread out the deduction over several years to account for the depreciation of these assets. Receipts are critical here, too.
Mileage is also absolutely deductible. There are just a few caveats to be aware of. For example, if your business isn’t home-based, you can deduct your mileage from business appointment to business appointment, but not to and from home. If your business is home-based, you can deduct the mileage to and from home, too. Keep a notebook in your car and jot down your mileage before and after every trip that applies.
“Small business owners don’t always think of all the things they do for their business or write off everything they should,” Curry said. “They may think of the main things like client meals, but not cell phone and Internet use or professional dues.”
If recurring service fees are automatically deducted from your credit card, simply get in the habit of circling them on your statements and saving them in one place.
3. Uncover ideas for growth next year – it’s never too early
Staying on top of your taxes as a daily, versus a yearly, exercise helps you stay on top of your business. It’s like weighing yourself when you’re dieting. You need ongoing information and feedback to keep you accountable and on track. Being proactive will help you shift your thinking from dreading April 15 as The Scariest Day of the Year to embracing tax planning as a way to fuel your success on a daily basis.
“If you plan ahead,” Curry said, “you won’t have as much pressure at the end of the year or be in a position where you have to come up with money unexpectedly.”
Use any mistakes this year, from lost receipts to missed opportunities for deductions, as a roadmap for next year. Get inspired to attend an educational seminar, set up a client gifting program, employ a young family member to help with some admin or give a little back to your community. All of these activities are typically tax-deductible with documentation. As you work with an accountant or accounting software, be aware of tax-deductible activities you’d like to take on in the future in addition to ferreting out deductible activities from the past.
Taxes? You got this. And it will get easier every year, just like any other area of running your small business.