Small business owners typically spend more than two weeks each year getting documents together so they can file their tax returns. Preparing now can help avoid stress later and could save you lots of money! Although there are many more exciting options this time of year, filing accurate tax returns is non-negotiable. If you own a business, it is your responsibility to properly account for the relevant financial transactions in your business. The following are some ideas to help you get there:
Locate and Organize Your Records
You need proof of income, expenses and credits you take on your tax return. At a minimum, business records should be kept for 3 years after the filing date, but it’s safer to retain all records for 6-7 years. The IRS recommends you keep employment records for a minimum of 4 years. Documents of incorporation or change of entity should be kept for the life of the company.
Not only do you have to save those records, you need to be able to locate the correct documentation if requested by taxing authorities. If you are feeling overwhelmed by the sheer quantity of paper you are accumulating, it may be time to digitize your records and store them on an external drive or the cloud. Services such as Dropbox, Evernote and Google Drive are becoming safer and more commonly used. Apps like Receipt Bank or Shoebox can help you store individual receipts.
Separate personal and business expenses – It’s easy to miss deductions when they’re scattered through multiple personal and business accounts. Opening a separate small business account with a related debit or credit card will make record keeping much easier, and a separate account is mandatory for corporations. Certain types of expenses may have both business and personal components, like cars, cell phones, home internet and utilities. You need to establish a reasonable allocation for business/personal use of these kinds of items and adjust your books accordingly.
Reconcile your bank accounts
Review bank statements, confirm you have documentation to support deductible items. If you see errors, work to correct them now. Providing your tax professional with unreconciled accounts will make preparing your taxes more difficult and costlier later. If your business is growing beyond basic spreadsheet accounting, you should consider investing in a small business accounting software program. Most companies are now offering online options which allow you and your accountant or tax preparer to collaborate on your accounting throughout the year. And most programs allow you to link your bank accounts, so transactions can be downloaded to the software program quickly and easily updating your records.
Update Employee and Independent Contractor Information
The deadline for mailing employees W-2’s and contractors 1099’s is January 31, 2019. The filing deadline for mailing Form 1096 to the IRS has moved up to January 31st, 2019 if your business is reporting payments in Box 7 – Nonemployee Compensation. Send contractors a Form W-9 now if you don’t have complete information and ask employees for current mailing addresses to avoid delays in January. This is also a good time to review the rules regarding classification of freelancers, independent contractors and employees at the IRS and Colorado Department of Labor websites. The rules have gotten stricter and the penalties for misclassification have gotten higher. If you need clarification for your particular situation, contact Colorado Department of Labor and Employment at 303-318-9100.
Maximize Year-End Deductions
If your business has had a profitable year, consider purchasing new office furniture, equipment or vehicles, and placing them in service before December 31st, so you can take a deduction for 2018. The Tax Cuts & Jobs Act provisions have expanded the options for immediately expensing many fixed assets.
Consider giving employees bonuses before year end to increase your deductions next spring. A holiday party or dinner for employees may also be deductible if the meal is not considered extravagant. Keep in mind that for 2018 and forward, entertainment is no longer a deductible expense, but food purchased at an event can still be partially deducted.
Accelerate payments and defer income
If you are a cash basis taxpayer, you will benefit from paying suppliers before year end for bills due in January. If you have customers who owe you money and can afford to wait, delay receipt of the money until January 1.
Review your business structure
As your business evolves, you may find that your initial choice of entity is no longer the most beneficial. Changes under the Tax Cuts & Jobs Act bill may mean that you should consider changing entity type to save money in the future.
Plan for the future!
Is your business growing the way you’d like? Are you meeting your financial obligations and paying yourself reasonable compensation for your time? Are you managing your tax burden throughout the year or madly scrambling to meet your obligations at tax time? Do you need help, but don’t know if you can afford it? The end of the year is a great time to evaluate your progress and whether you are meeting your goals.
Plan for taxes!
If you’re not sure how much you owe in federal taxes, use the 30% rule which is what experts say you should plan on if you don’t know your exact tax obligation. Expect to pay 30% of your net income in Federal or state tax. Start now to save for taxes due when you file and if possible, consider making catch-up payments now. You might still be subject to penalties for failing to pay estimated taxes when due, but any payment you can make now will help when you file.
Read up on tax reform (and how it affects you
The Tax Cuts and Jobs Act (TCJA) took effect on January 1, 2018, and it will mean big changes for the way C Corporation and pass-through entities pay their taxes. Most companies will see a significant reduction in tax, as C Corporations will now pay tax at a flat rate of 21% and pass through entities may be able to deduct up to 20% of business income. There are restrictions and limitations and high-income business owners may find their deduction phased out completely.
The information is provided for general information only and should not be construed as specific tax advice as your situation may vary.