How To Prepare Your Small Business For Tax Season
Tax season is rapidly approaching and as a small business, especially in your first year of business, you may not have all the knowledge of how to file your taxes. The process is different than how an individual working for a corporation would file taxes and there can be a lot of little details that are easily forgotten. Here are some of the most important things to do to prepare your small business to get through tax season without any hitches.
The most important thing to make filing your small business taxes easy is to track everything related to your business in one place. Every business expense and income should be recorded and dated, whether or not you deem it important. The common documents that you should have a record of throughout the year include:
· Bank statements
· Sales slips
The easiest way to track everything is through an accounting software created especially for small businesses, such as QuickBooks or Xero. If you’re a self-employed business, it’s best to keep your business and personal expenses separate, ideally in a completely separate bank account. This simple move will keep you from spending several hours combing through your expenses to distinguish personal from business transactions.
Know the Deductions You Qualify For
As a small business, you can qualify for a large assortment of deductions on your taxes including vehicle, home office, business travel and more. Here are some deductions you may not have known that you could qualify for:
· Employee payments – Even if you’re self-employed and the sole employee of your company, any contractors that you’ve hired throughout the year can be deducted.
· Professional expenses – Any money you pay your lawyer or accountant are tax-deductible.
· Advertising – If you invest money into paid ads, creating a website, or travel, these can be covered and written off as advertising expenses.
· Property – Any facility you use for business purposes are deductible. This includes your home office (the portion of your mortgage and utilities relevant to the square feet of your office) or a co-working space membership, your phone bill (the percentage that you use for business) and any equipment you use for your business such as office supplies or a computer.
· Interest – If you used credit or a loan to finance any part of your business, you can deduct the interest expenses.
· Travel – If you travel for a business trip (think to a conference or to meet a client), you can deduct 100% of the costs of that trip. You can also deduct mileage if you use your car to get to meetings or conduct business.
· Insurance – Most insurance premiums are considered business expenses and if you’re a sole proprietorship, you may also be able to deduct your health insurance premiums.
Don’t Forget Self-Employment Tax
If you’re a profitable sole proprietor, you may have overlooked your self-employment tax, which includes Social Security and Medicare tax. This can add up to be a significant part of your tax bill, so be prepared for that. Make sure to calculate your taxes as part of your total estimated taxes for quarterly estimates. Additionally, be prepared on April 15 to pay both the balance for due for last year’s taxes and the first quarter installment of next year’s taxes.
Avoid Audit Traps
It can be easy to make simple mistakes when doing your taxes, but these mistakes can get your small business into serious trouble with the IRS. Pay attention to how you classify employees. Independent contractors are not employees and you can’t deduct the same amount you would for a full or part-time employee, so misclassification of this can be viewed as an attempt to evade taxes.
Another easy trap to fall into is regarding deductions. Your deductions shouldn’t amount to more than your income and if they do, you will be flagged by the IRS. Additionally, not all home-based business expenses qualify, so make sure you’re qualified to deduct your home office expenses before you do so.
Tax season can be a dreaded time for many small businesses, especially if you don’t know how to prepare your documents correctly. Take the stress out of taxes by hiring a professional to do it for you. Infinity Bookkeepers is certified in QuickBooks and Xero, so your small business will be in good hands. Contact us today to get started on your 2019 tax return!