As a small- to medium-sized business owner it can be daunting and stressful to prepare your own taxes. So many questions -- Can I write off my trip? Can my business pay for life insurance or school loan interest? What about IRS regulations?
In 2019 there were 30.7 million small businesses in the U.S. - that’s 99% of all businesses in operation - and every business is different, so every answer to those questions is individual to the needs of that business.
Putting your small business accounting in the hands of someone who knows all the ins and outs of organizational structure, tax preparation, compliance, deductions, credits and penalties isn’t simply a smart idea. It gives you a competitive edge, in terms of both time and money, freeing you up to concentrate on growing your business to its full potential.
Here are 6 actions to take before tax season to get your small business prepared, bypass short- and long-term tax-related surprises, and best position you and your business for success.
#1 Ensure your business is organized with the tax structure that suits your needs and serves you best. The decisions you make regarding organization affect every aspect of your business, and seriously influence the way your small business is taxed.
Key Tip: Ask your accountant if your business structure serves both the amount of control and the amount of risk you’re willing to take, especially if it’s not a sole proprietorship.
#2 Tax-saving opportunities happen all year. If you wait until the weeks leading up to April 15 to look for deductions or credits your business might be eligible to receive, you’ll definitely pass up chances to save money.
Key Tip: Ask your accountant for important dates and deadlines to be on the lookout for, such as the last day to establish a Simple IRA.
#3 Nearly every transaction you make as a small or medium business owner will impact your tax liability, so keeping detailed records is imperative. By accurately tracking your income and expenditures during the year, you will have the best information concerning what’s taxable and what’s not.
Key Tip: Ask your accountant to study your past tax returns specifically looking for deductions or credits you may have missed.
4. The amount of money in your checkbook may have no bearing whatsoever on your taxable income. It doesn’t necessarily determine what you owe since it doesn’t accurately reflect profit and expenditure.
Key Tip: Ask your accountant how to report cash or credit card transactions so you can stay abreast of IRS regulations and avoid audits.
5. Commingling your books - making personal debits on your business accounts - is never a good idea. Personal expenditures are ineligible as business tax deductions, because the IRS classifies them as compensation. By reporting certain expenditures as “fringe benefits,” they’re subject to payroll taxes and will avoid a possible audit.
Key Tip: Ask your accountant what transactions can be safely calculated as business expenses, which should be considered fringe benefits and which should be avoided altogether.
6. Misclassifying an employee as an independent contractor can incur enormous penalties - up to 41.5% of an independent contractor’s wages for the prior three years. Not withholding income tax, Social Security and Medicare for someone who’s actually an employee makes your small business non-compliant according to the IRS.
Key Tip: Ask your accountant for details about classifying the people who work for you.
Without outsourcing a real-time professional accountant for your small- or medium-sized business, you jeopardize all your hard work by missing opportunities to save or incurring unnecessary penalties. Don’t wait until tax season to seek advice or discuss an issue. Hire a small business accountant today.
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