For many people, tax season means frantically searching for receipts and filing at the last minute, hoping not to get audited. When it comes to tax preparation for business, it’s important to stay on top of things.
Depending on the size of your business, you’ll need to figure out a schedule to give yourself ample time to get your tax documentation in order. The more complex your business, the more time your taxes might take.
In this article we’ll share some tax season tips, so you don’t have to scramble and stress when your filing comes due.
Be aware of tax deadlines
The traditional tax deadline in the United States was April 15. Over the past few years, there have been some changes in this date due to the COVID-19 pandemic. Check the IRS web page for the latest filing deadline. Do the same for the state you live in.
Some business structures have different deadlines. S corporations need to file their taxes for the tax year by March 15. With an S corporation structure, the owner has to pay taxes on their part of business income as part of their personal tax return.
Non-profit organizations do not file a traditional tax return. They file an informational return called form 990. The filing deadline for a non-profit entity is May 15th. In some instances a non-profit’s income can be taxable. If this is the case then the organization must file a 990-T with their 990. An extension for the 990 can be made as late as November 15th.
If for some reason your tax documents aren’t quite together in time, you can apply for an extension. This will extend your filing deadline, but you’ll still have to pay your estimated taxes by the original filing date. (March 15 or April 18). If you don’t pay on time, you will be charged a late fee by the IRS.
Filing an extension will give you an extra 6 months to file the paperwork, but you must apply for the extension by the filing deadline.
Gather all documentation and financial records
The best way to prepare for tax season is to always know where your documents are. Staying organized will make your life a lot easier when the crunch comes. Scan all your receipts and documents to save space and make everything much easier to find. Make sure you keep a copy of all these receipts in the cloud.
Don’t wait until the last minute to begin gathering statements, receipts and filling out your return. All of your financial reports should be managed monthly to avoid stress, confusion, and mistakes. Have a folder for everything, and you’ll simply be able to pull the information when the time comes.
Take advantage of possible deductions
Tax deductions, or write-offs, are expenses that you can deduct from taxable income. By taking advantage of all the deductions you can, you’ll significantly reduce your tax bill. But, the expenses you write off must fit the IRS criteria of a deduction. Here is a list of common legitimate tax deductions you can use for your business:
- Business use of your vehicle
- Promotion and advertising (this includes things like buying ad space, launching a website, sending cards to clients, hiring an artist to design a logo, sponsoring an event, or social media campaigns.)
- Business meals can get a 50% deduction if it is necessary, not overly extravagant, and the business owner or an employee is present at the meal. Meals provided for employees at picnics and office parties are also eligible.
- Business insurance
- Contract labor (if you pay them more than $600 per year, you need to send them a Form 1099-NEC by January 31 of the following year).
- Education costs that add value to your business or are industry-specific (seminars, classes, books workshops, subscriptions to trade or professional publications, etc.)
- Legal and professional fees
- Home office expenses (these will need to meet two requirements: you must conduct business out of your home office, and what you purchase must be used exclusively for your business)
- Rent expense
- Salaries and benefits (the employee cannot be a partner, LLC member, or sole proprietor)
- Telephone and internet
- Travel expenses (IRS-approved travel expenses include using your car while at a business location, travel to a destination, parking tolls and fees, tips, meals and lodging, shipping of baggage, business calls, dry cleaning on a business trip, taxis, etc.)
Aside from these deductions, there are also some write-offs that a business owner can claim on their individual returns. These include expenses related to:
- Child and dependent care
- Charitable contributions
- Health care
- Retirement contributions
It is extremely important to remember that with tax preparation for business, especially in the case of deductions, you need to document everything. Save your receipts, and make sure that you create digital copies of any record. Create a series of digital folders where you can organize these records for easy access when needed.
Set aside enough tax money
How much your business pays in taxes depends upon a variety of factors, including the obvious: the size of your business. However, there are free online calculators available that will give you an idea of what you’ll owe.
Keep in mind that federal tax calculation isn’t the only tax preparation for business–you may have to pay some of these other taxes (depending on the nature of your business):
- Franchise tax
- Property tax
- Sales tax
- Excise taxes
A good rule of thumb to follow when saving for taxes during the year is the 30% rule. Set aside at least 30% (and up to 40%) of your business income to cover taxes. Tracking this sort of thing is important, and a great way to make sure it’s done is to hire an accountant or bookkeeper. These professionals will manage all aspects of your cash flow, and preparing for taxes is one of their specialties.
It’s also important to calculate your estimated tax and pay that throughout the year. Typically these payments are made in quarterly installments. By doing this you spread the payments out over time and avoid having to pay a lump tax bill with your return. Also if you file late, the payments have already been made and helps you avoid tax penalties when you complete the return.
Whether you hire a professional or do the bookkeeping yourself, it’s a best practice to use good accounting software to manage the finances. This software can help you track accounts payable and receivable, generate reports that give you a clear understanding of your company’s profitability, and assist in tax preparation for business.
For small businesses, an out of the box software should work fine, and won’t require a ton of customization. As your business grows and becomes more complex you’ll want to think about upgrading to a custom enterprise resource planning (or ERP) system.
Utilize tax professionals
If you own a small business you may not have the resources to be able to hire an in house tax expert. If this is the case there are many accounting firms that specialize in guiding small businesses through the complex tax system of the IRS.
Having a tax professional on hand during the year will help you avoid having to pull together complex information at the last minute while completing your return because they can give you guidance throughout the year for what you should be prepared for.
Not only can they give you advice you can also hire them to complete your return on your behalf. In these situations they will often give you or any accounting staff on your team a questionnaire and workbook of the sections of the return that are applicable to your business. You or your staff can provide the answers and the accounting firm will take your responses and complete the return on your behalf. Like in any venture where you are not the expert, always consult with a tax professional before completing your taxes.
Preparing business taxes shouldn’t be a hassle if you have your financial ducks in a row. By staying on top of your financial information all year long, you’ll not only be ready for tax season, but also create a more functional business in every way. Use these tax tips to make sure that you’re never caught without vital information required by the IRS.
Having an account with NorthOne makes organizing all your business expenses easy. When tax time comes, you’ll save time and avoid mistakes by staying on top of your finances. Sign up for NorthOne today and get a limited time reward of $50 when you deposit $50.