Steps Small Businesses Should Take Now (to Get Ready for Next Tax Season)
With today being the traditional tax filing deadline for individuals and many small businesses (this year the official deadline is Monday, April 18, due to a Washington DC holiday), it's a great time to focus on what small businesses should be doing to prepare for the next tax season.
After all, taxes likely still have your attention, and it's never too early to prepare, since much of filing preparation has to be done before your tax year ends next December.
In reality, preparation for filing taxes is a year-round endeavor for small businesses involving many different steps and issues. It may include estimating the tax payments that need to be made, planning to buy or lease fixed assets, developing retirement-saving and deferral of income/expense strategies.
Waiting until the last minute to try to accomplish these things is at best of no effect and at worst can cause unexpected negative surprises. To help avoid these nasty consequences, here are a few tips to help get your planning started today:
First, of foremost importance is to establish a good, efficient accounting system. There are a variety of options for bookkeeping programs from which to choose.
Some business owners prefer something as simple as Microsoft Excel to chart and classify their income and expenditures. Others prefer more accounting specific software.
For many small businesses, a version of Intuit's Quicken is all you need. It's simple to use - in my mind it's little more than a glorified electronic check register so anyone that can handle a manual check register can use Quicken. But in that simplicity, you may be surprised at how it eases your burden and saves you time. Plus, it can give you powerful information to help you run your business better!
Other businesses will need more "full charge" accounting software like Quickbooks or Peachtree.
But whatever you do, CHOOSE ONE and get going! Doing everything manually and waiting until the year is over to try to pull everything together is a recipe for disaster.
The next tip is this – hire someone to help you. Regardless of the program you choose, what you get from it is only as good as what goes in. Remember the saying "garbage in, garbage out? It's really true with accounting records.
So consider hiring an accountant or at least a very good bookkeeper. Having someone on your staff familiar with accounting concepts, terminology and principles makes the tax preparation function easier and more meaningful.
After you get the accounting system in place, you, the business owner, need to diligently monitor transactions for income and expenses throughout the year.
A foundational key here is to perform monthly bank reconciliations. If the accounts are reconciled, you will know that all transactions have been accounted for, or at least can research any missing transactions before the year ends.
Further, any questions about categorizing certain things should be noted to discuss with your CPA. Having your CPA do a periodic review of the business financial statements (at least quarterly) is another good way to ensure your books are accurate and is a worthy investment. In doing so, your CPA can pick up on transactions that may be categorized incorrectly or that just seem unusual.
And of course, receipts and supporting documentation for all transactions should be filed in an orderly manner throughout the year.
Another good practice essential to eliminating nasty surprises at tax prep time, is to review quarterly results with your CPA. Doing this helps you make more accurate estimated tax payments, and could help avoid underpayment penalties that could be assessed.
This kind of "real time" planning also gives you time to make critical business decisions, such as whether to purchase fixed assets, pay out employee bonuses, or contribute to retirement plans. These are decisions not to be made in a "no information" vacuum.
Finally, make sure your business is in compliance with all tax filings, especially payroll tax filings. You might think this goes without saying, but then again, you might be surprised how many ignore this to their detriment.
Make sure all state and federal payroll forms have been filed and deposits made. Remember that Forms 1099 and 1096 will also need to be filed for any independent contractors who were paid $600 or more during the year. You will need as part of your accounting system a way to track those. Failure to do so comes with very high potential penalties.
If you follow the advice above, your business will be in better shape to get its taxes done timely and efficiently. The upside? Less stress, reduced tax prep fees, more accurate and timely business management information, and if due a refund, improved cash flow from a faster refund!
