The arrival of tax season can often come with a sense of dread for many small business owners because it’s not just about paying taxes, but making sure that your financial records are kept pristine and well-organized. This guide will walk you through a structured approach to get your bookkeeping in shape, helping you navigate the complexities of tax filing with ease.
Step 1: Get Your Bookkeeping in Order
Accurate and Consistent Transaction Recording
The backbone of solid bookkeeping is to accurately record every business transaction.
Making any mistakes here can lead to stressful tax complications – but it’s easily avoidable. So first you need to make sure that every business transaction, whether it’s a purchase, sale, or expense, is recorded in your general ledger, which refers to the book of final entry. Consistency is key.
And second that you’re categorizing each transaction as accurately and consistently as you can.
For example, if you’re running a pizza place, you should record all of your business transactions, and organize the expenses in the correct categories every month.
Balancing Your Books
Try to make your books as balanced as possible, especially if you use double-entry accounting. This means the total of your credits should equal the total amount of your debits.
Using QuickBooks can simplify this process because it will automatically do it for you, but if you like doing your bookkeeping old school, with paper or Excel, consider checking out our guide on double-entry bookkeeping to walk you through the process.
Double-Checking With Your Bank Accounts
Reconciling your financial records with your bank accounts to make sure that your books align with your bank statements. This can save you and your bookkeeper a lot of time and help you avoid any problems down the line. Only after double checking with your bank account can you consider your bookkeeping complete.
Don’t Mix Your Personal and Business Expenses
Mixing personal and business expenses can cause major headaches for you come tax season. So establishing separate accounts for business and personal transactions will help you completely avoid that problem and will make sure you don’t miss out on any deductions. Read this article if you want to know even more reasons why you shouldn’t mix your personal and business accounts.
Consult a Professional
DIY bookkeeping can be a great way to save some money upfront, but we recommend that you have a CPA or tax professional take a look at your books. They can make sure that you have the proper setup, you don’t miss any deductions, and give you some great advice on year-end tax strategies, setting your business up for a smoother tax season.
At Gemini Accounting, you will get access to unlimited, on demand consultations with our tax professionals when you work with us. This means you can call us anytime you want, even if it’s just to give yourself peace of mind without any extra costs.
Step 2: Don’t Miss A Single Deduction By Organizing Your Paperwork
Documenting Deductions
Organizing your receipts and your other documents is crucial when you prepare for tax season, especially for getting all the deductions you qualify for.
This becomes a lot easier once all your business transactions are recorded properly and appropriately categorized.
Not sure which business expenses are tax deductible? Check out our guide on the top 10 small business tax deductions.
Going Paperless
It’s required to keep all business records for 3 years by the IRS.
Managing all your physical documents; like payroll records, invoices, and receipts, can be overwhelming. So upgrading to a digital method to keep your records can be a game-changer
- Using cloud services like Dropbox or Google Drive, or dedicated document scanners, like ScanSnap or Alaris.
- Easily keep track of your receipts by using receipt-tracking apps, like Shoeboxed and Receipt Bank, to further streamline the process, making sure that you never miss out on a single tax deductible.
Step 3: Set Aside Enough Tax Money
Understanding Estimated Tax Payments
The IRS requires you to estimate tax payments for those who will owe a $1,000 or more. So avoid any surprises at the end of the year, follow these tips:
The 30% Rule
Setting aside 30% of each payment received is a good amount that will cover most of your federal tax obligations if you’re not sure how much you owe in federal taxes.
There are three ways in which you can save up for your tax return so choose a method that suits your business best.
- Yearly: Take the total income of your business for the past year, divide it by four, and then calculate 30% of that amount. This is how much you should be saving (and paying) for your quarterly estimated taxes. (Use this if you don’t expect a drastic change in your business income this year.)
- Monthly: To calculate the amount you should set aside for taxes, total your income for the year and divide it by the number of months to get your average monthly income. This is especially useful for new businesses or ones that anticipate paying more taxes this year than the year before.
- Per-Payment: Whenever you receive payment from a client or customer, deposit 30% of it into a business savings account. Use this strategy if you are a new business and not sure of your annual income.
Separate Tax Account
Create a dedicated account for tax savings to avoid using these funds for other reasons. And you can set up automatic transfers to this account, so you can set it and forget.
State Taxes
Remember that taxes aren’t just federal, you also need to pay state and local taxes, including sales tax, property taxes, franchise taxes, and excise taxes, and these can vary and so you need to pay attention to them.
Research your state’s specific tax requirements and consult with a CPA to cover all bases.
Step 4: Stay Informed About Tax Reforms
Understanding the Tax Cuts and Jobs Act (TCJA)
Tax laws evolve, and you need to stay informed about any changes that take place.
The TCJA (Tax Cuts and Jobs Act), which took effect on January 1, 2018, brought significant changes, especially for C corporations and pass-through entities. Key points include a flat 21% income tax rate for C corporations and up to a 20% Qualified Business Income tax deduction for pass-through entities. However, there are some nuances that exist, especially for specialized service businesses or those with employees.
Adapting To TCJA Tax Reform
The TCJA changed several deduction rules and completely eliminated some.
Client entertainment expenses were 50% and are now 0% deductible. Office meals and snacks are now only 50% deductible and before they were 100%. And employee transit benefits used to be 100% deductible, and now are 0%.
To adjust to this you simply just need to create separate records for these expenses. Also you should make a separate record for Transportation Fringe Benefits because they will be deducted differently than other fringe benefits. And make sure that you stay updated on the IRS publications for the latest information.
In A Nutshell
Being successful tax season will require you meticulous preparation and organization of your financial records; it’s more than just paying what’s due. Follow this guide step by step so you can ensure a smoother, more efficient process when filing your taxes. Keep in mind that starting early and seeking professional advice from a CPA or Tax Professional can save you a lot of time, money, and stress in the long run.