As a small business owner, it’s best to take steps to prepare for tax season throughout the year. That way, when it’s finally time to file, you already have most of the heavy lifting done. To lower your tax bill as much as possible while still maximizing your business’s potential, it’s good to have a preparation list to give you some great insight.
Meet With Your Tax Preparer and Bookkeeper Throughout the Year
It doesn’t have to be tax season for you to visit your bookkeeper or head down to a Tax Group Center. On the contrary, it’s best to visit your bookkeeper and a tax preparer at least two times a year. You can give yourself an idea of how well you’re managing your books, and you can start to form an idea of how much you’re likely to owe in taxes. Even better, your preparer can let you know which tax credits you qualify for, as well as how to maximize them before the next tax season rolls around.
Keep Business Finances Separate From Personal Finances
Do everything you can to ensure you don’t mix your personal finances with your business finances. This is especially common with sole proprietorships. Even if your business isn’t particularly big or all that profitable, you want to do everything you can to stay on the IRS’s good side. By making it hard to differentiate between personal expenses and business expenses, the IRS may get the idea that your business is more of a hobby, which means that you may not qualify for certain business expenses that can lower your tax bill. Ensure you keep separate bank accounts and credit cards.
Maintain Excellent Records
At least once a week, take out some time to sort out your business records, so you can easily hand your documents over to your Tax Group Center professionals when you’re ready to file. Common business deductions to separate into individual groups include:
- Start-up expenses, such as the costs associated with investigating a potential business
- Health insurance, if you offer your employees health care coverage
- Charitable donations, such as donating used equipment or software
- Home office, if you have a space in your home that’s solely dedicated to work and nothing else
- Meals, such as business breakfasts, lunches, and dinners
- Travel, including the number of miles you put on a vehicle for traveling for business purposes
- Entertainment, making sure you note the date, amount, purpose of the business entertainment, location, and names of individuals/business relationships entertained
Look Over the Loan Amounts Listed on Your Balance Sheet
Are you paying off a business loan? If so, you may already know your loan payments decrease your tax liability. That said, you’ve got to go about recording your payments the right way. Specifically, you need to bear in mind that you don’t want to record the entire loan payment amount as a liability decrease. Instead, you want to factor in the interest, not the principal, that you pay on the loan as being tax deductible. This is another great reason to keep in touch with your bookkeeper and tax preparer throughout the year, so you can course correct before you get too far off track.
Examine Your Equipment Purchases
Whenever you buy a new piece of equipment or software for your business, ensure you depreciate it the right way. There are leasehold improvement and Section 179 deductions, as well as certain types of depreciation for business equipment. Talk with your tax preparer before you buy any equipment for your business to get an idea of how that specific purchase will impact your tax bill.
There’s a lot that goes into operating a business, no matter how large or small that business is. That said, be sure you carve out some time to tend to your upcoming taxes to eliminate as much of the last-minute hassle and fuss as possible.