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6 Tips for Businesses to Stay Organized For Tax Season
Here are our tips on how to stay organized in advance of tax season, which can not only reduce stress, but can also reduce your actual tax obligations.
Just thinking about tax season can be daunting for many people, and when you add in the complexities of owning a business and the additional responsibilities, it can be even more so. How can I reduce the stress? While some people might hide their heads in the sand like an ostrich, that doesn’t really change reality, and avoiding impending and unalterable reality will not change the outcome. So, the best way is to be prepared. Here are our tips on how to stay organized in advance of tax season, which can not only reduce stress, but can also reduce your actual tax obligations.
Track Tax Deadlines
In years past, the advice would have been to “create a tax deadline calendar to keep track.” Of course, we all have various calendar apps these days, from Outlook to your phone, to integrations between those two and dozens of other programs. While most individual taxpayers only face a couple of deadlines (April 15, and the extension deadline, if they requested one), business owners can face dozens. These can include deadlines for not only filing their annual tax return, but also estimated tax payments, extensions, various state filing requirements, and deadlines for other reporting, such as sales and use taxes, payroll taxes, and more. Missing any of these deadlines can result in paying penalties and interest, and in the worst cases, even criminal prosecution. So whether you use a free app or pay some, it’s worth the investment of both time and money.
The Cloud Makes It Easier To Manage
Trying to keep track of receipts for a year can be challenging. Trying to find them three years later or even longer, can be impossible, but that’s how far back the IRS can go, even if you aren’t Bernie Madoff and just made a simple mistake. (For intentional mistakes, aka tax fraud, the IRS can go back 6 years or more.) Whether you use a high-end document management system designed for business, or a simpler document storage site for gig-economy workers and small business owners, the most important thing is to make sure it is easy for you to use.
Most small business accounting systems include online management of documents like receipts and invoices, which makes it easy to access them whenever you need them. For those paper-based documents you might still receive, such as utility bills or other invoices, you can easily scan them into a digital format. (You can also request almost any invoice be sent to you in digital format.) A digital format is much more convenient (and accessible) whether at your office, your home office, a client’s location, a bank loan officer’s desk, or … in preparation for an audit.
Keep Business And Personal Separate
For most taxpayers who work for an employer and receive a W-2 at the end of the year, this isn’t a problem. But for those who run a business or earn income from another source, even one that is just “on the side” of their real job, it’s imperative that they keep expenses, income, and payments from their personal life and business life separate.
When it comes to a partnership or corporation, laws require separation of business expenses and much more formal accounting. However, while taxpayers who file a Schedule C or receive income from contract work don’t necessarily need to follow such formal rules, “intermingling” business and personal finances can lead to headaches, especially if the person faces an audit or is trying to demonstrate the success of their business for the purpose of a business loan.
Track Income and Expenses Separately
For individuals, micro-businesses and gig-economy workers: For the less-tech inclined, envelopes for each category of business can work, but then, that’s relying on paper-based products. It’s much more appropriate to use the same categorization, but with digital folders and files.
For other businesses: Use a real accounting system that keeps track of income, expenses and every other aspect of your business. The costs are appropriate to the business size, and help not only keep a business’ books in shape, but that also ensures the finances can withstand an audit or scrutiny when applying for a business loan. Having solid financials also gives the business owner more accurate insight into the financial health of the business.
Keep a Log of Business Miles
If you plan on claiming a deduction for the business use of your car, keeping a log is essential. Just guessing at a number at the end of the year might work for awhile, but a true log, in addition to notes about the purpose of those miles you drove or flew, will have you much better prepared to prove it, if you need to.
See a Professional
Even a doctor wouldn’t operate on him or herself, and unless you’re a tax professional, you aren’t a tax professional. A CPA or Enrolled Agent has experience in tax law, and is appraised on ethics, and is ready to help small business owners and individuals find the best strategy to legally minimize tax obligations now, and in future years. They can’t tell you this, but the costs of their professional services will often be less than the amount they can save you. And even if it costs a little more, the taxpayer also receives much greater assurance that their taxes have been properly prepared and submitted to the IRS and states.