Plan ahead for a stress-free tax season
By now you have probably mentally recovered from the cash you had to fork over to the IRS or the delight of your hefty refund has waned. While April 15th still feels blissfully far away, now is time to start planning ahead for next tax season.
While preparing for taxes now may seem absurd, the sooner you prepare, the easier it is to avoid common last minute mistakes, particularly if you are a small business owner. If you, or your accountant, spent last tax season foraging through a year’s worth of disorganized invoices, receipts and bank statements, make a plan now that will have you dodging tax-related headaches and stress this spring.
Get Your Records In Order
Your accounting system won’t do you any good if you’re putting records in the system at the last minute. Keep detailed, organized records of all your invoices, bank statements and receipts all year long. If you have a habit of falling behind, set reminders periodically through the year, so you only have to slug through and organize a couple month’s of records at a time instead of a full year’s worth.
If your small business works with subcontractors, you must file an IO99 form for every subcontractor you pay more than $600 to over the year. These forms need to be issued in January, not April, so it is important to have the tax ID numbers and current address of the subcontractors you paid before the next calendar year. By the end of summer, you can predict which subcontractors you will have paid at least $600 for the year and start collecting information you need from them in advance. Furthermore, avoid running into trouble with IRS by having the necessary paperwork on file to prove that your subcontractor is indeed a subcontractor and not an employee.
Check It Twice
At the very least, you need a balance sheet and income statements when filing your taxes. Verify and analyze everything listed on your statements including all your assets, liabilities and equity (i.e., cash assets, accounts receivable, inventory, equipment, accounts payable, loans, etc.). Prepare a bank reconciliation by comparing your bank statements with the records in your accounting system to catch any discrepancies before trying to file your taxes. Catching any errors early, on either side, will save you a world of trouble later.
Make a List
with all your paperwork organized and verified, you should have a good idea of what your business’s finances look like. Now is the perfect time to check in with your accountant, or tax preparer, with a list of questions already in mind.
Predict how much you can expect to be billed based on your business’s current standings. No business owner wants to feel surprised by how much they owe in taxes, particularly if they experienced a profitable year. Getting a prediction on what you will owe will give you time to set aside the money to cover your tax bill. Have a conversation with your accountant or tax prepare prior to the end of the year on what you can be doing to reduce your taxes. For example, if you had a profitable year, it could be a smart idea to invest some of that money on big business expenses, such as new equipment. This would reduce your profit before the end of the year and subsequently lower the amount of taxes you owe.
Additionally, it is always a good idea to stay up-to-date on any changes in tax laws. As an entrepreneur, you might not keep up with new tax laws or be aware of any new tax breaks you might qualify. Fortunately, your accountant or tax preparer will. Take the time to ask them about anything new and how it will affect you. The earlier, the better.