Like it or not, the Tax Man Cometh… As we continue our efforts to wrap up for the end of the year, we can’t forget one of our biggest obligations: tax preparation. For some small business owners, this will be an easy exercise since they have maintained records throughout the year. For others, it is time to pull out the boxes and bag of notes and receipts to organize. Whether you fall in Camp A, Camp B or somewhere in the middle, here are some year-end tax preparation tips to consider so you will be ready to meet your obligations and form submission deadlines.
- Organize your financial documents: You will need to be able to show proof of the business income that you plan to report. Gather any and all documents that are business related: bank statements, sales receipts, credit card statements, proof of returns and allowances, 1099s you may have received from other companies and any other source of business income. Documentation of your business expenses such as mileage logs, payroll reports, advertising, office supplies, equipment purchases, insurance, etc. will also be needed. Remember to look for receipts of items you may have purchased using a personal account rather than a business account.
Determine where you stand: Using your financial documents, you can now prepare the reports to understand how your business did during the year:
- Balance sheet: it will provide a snapshot of how your business is doing financially at a specific point in time.
- Income statement (Profit & Loss Statement): Did you have more expenses going out than income coming in or vice versa? The income statement will provide valuable information about revenue, sales, and expenses for the company.
- Cash flow statement: will measure how well the company is managing generating and managing the cash on hand to meet debt obligations and pay for operating expenses and fund investments.
The good news is you do not have to be an accounting whiz to create these documents. Hiring an Accountant or Bookkeeper can make your life easier, as well as using one of a variety of accounting applications and software available online.
Schedule a meeting: Now that your documents are collected and organized, contact your tax preparer for a pre-filing meeting. Have him/her review the documents to help determine your current tax position. Discuss how one of the scenarios below can improve your position and tax obligations:
- Deferring income: Any income received by December 31 counts as income for the current year. Ask your accountant if it makes sense to defer December payments until January to cut your tax bill, keeping in mind how it may impact the following year’s reporting.
- Making a large purchase: Expenses can help you maximize your deductions. Do you have equipment or software in need of updating? Need supplies to get a running start for the new year?
- Charitable donations: Contributions to a non-profit do not only help the community; it can also help your business finances. Non-profit organizations are always looking for donations, especially during the holidays. If you can’t afford to make a financial contribution, consider making an in-kind donation of goods or services that can be claimed for their fair market value as a deduction.
- Plan ahead: Now that you understand what did and did not work in terms of your business operations and finances this past year, plan ahead. Did you find yourself scrambling to locate documents? Had more expenses than expected? Create a process for better record keeping, invest in accounting software and schedule periodic reviews of your books.
Tax preparation is an annual exercise. While we can’t ever completely eliminate the pain of tax preparation, planning ahead and keeping the tips above in mind will hopefully make completing your taxes a less of a headache for you, your employees and your tax preparer.