If you are like many small businesses, you did NOT file your annual taxes on April 15. Instead, you filed for an extension, allowing you up to October 15 to get it done. Have you filed it yet? I noticed the accountant who works in the office building next to mine has been in his office a lot this past week — doing small business taxes, I’m sure.
This is the time of year when I start to see sales of my tax guide for small business owners pick up. As many of you know, it was small business owners who were filing for bankruptcy instead of taking every possible tax deduction that propelled me into small business consulting. I couldn’t stand to watch people sent their hard-earned money to the government unnecessarily. They were robbing themselves of the success they had earned! I firmly believe that everyone should own a small business and take advantage of the tax deductions. I don’t know what the future tax code will look like, but for right now, you want to be a small business owner. And if you can work out of you house, follow the rules and take the home office deduction. It is an incredible advantage. But you have to know the rules.
If you want to make sure you take every deduction possible, pick up my tax guide here.
Small Business Owners Tax Guide
If you haven’t purchased your copy yet, I encourage you to do so. I really tried to fit as much useful information as I could. I tried to cover all the topics my clients could be claiming regularly, plus some. And did you know it’s tax-deductible. Any expenses you incur in educating yourself about taxes is tax-deductible. Isn’t the IRS grand?
But now’s the time to prepare for next year’s tax time. If you haven’t done so already, here are 9 tips to make tax-time less taxing.
Tip #1 CREATE A SYSTEM
Decide where and how you are going to store your financial information. If you are going to use file folders, get them labeled and filed. If you are going to use envelopes, get them out and labeled. Talk to your accountant or bookkeeper about what their preferences are. Many of them can help you get organized. Start documenting your income and recording your expenses TODAY. It can evolve over time, so don’t feel that you have to keep using a system that doesn’t work for you and how your operate. If you don’t know what software program to buy, go to your local office supply store and buy a ledger book. Even a spiral bound notebook is better than nothing.
Tip #2 START EARLY, UPDATE OFTEN
Don’t wait until April 1st to get your records together and dump them on your accountant. Some IRS rules state that expenses must be recorded within 3 or 7 days of the event to be deductible. Don’t lose out on valuable deductions because you “forget” to write them down. Don’t just stuff receipts in one big envelope or shoe box (I’m bad at this — and I know better!), sort them by like-expense (this is a great job for your kids — pay them by the hour instead of an allowance and take the tax deduction). If your budget is tight, you should record your expenses not less than weekly. If you have a little more flexibility, record all of your expenses monthly. Then, the first week of January, you should have a well-organized and accurate picture of the previous year’s finances so your accountant can get your tax return done early. Who knows? You may have so many more deductions or tax credits this year compared to last that you overpaid your quarterly estimated taxes and are due a refund.
Tip #3 USE A BUSINESS CHECKING ACCOUNT AND A BUSINESS CREDIT CARD
Unless you are a sole proprietor, you should take precautions against co-mingling your business and personal funds. The best way is to establish a business checking account, using your EIN number, not your Social Security Number, and take out a credit card in the name of the business. Early on, you may not be able to establish credit in the name of the business, so the credit card may be reflected on your personal credit. Even if that’s the case, choose one credit card and dedicate it to your business needs.
ALL expenses for the business should be paid out of one of these methods and all income should be deposited into the checking account. Do not take cash withdrawals from an ATM from the business account. Even if you pay all your bills electronically, get in the habit of writing out a check (or at the very least, write an entry in QuickBooks) for each expense. To pay yourself, write yourself a check and deposit it into your personal account. Better yet, set up a direct deposit for yourself. On the flip side, DO NOT use a business check or the business credit card for your personal expenses. Only if you believe the expense will be a deduction at tax time would you pull out the business credit card.
Tip #4 FILE FOR AN EXTENSION ONLY IF YOU NEED TO
Most small businesses do not follow Tip #1, so they put their accountant in a bind to get their return done before April 15th. Many accountants routinely file extensions for their business clients so that they can focus on personal returns January through mid-April and focus on business returns June through October. Remember, any tax you owe is due on April 15, whether you file your return or not. Filing for the extension subjects you to a penalty and interest charges. Plus, your current year estimated quarterly taxes are based on last year’s taxes, so you want to know your tax liability sooner rather than later.
Tip #5 TAKE TIME TO REVIEW YOUR RETURN
Accountants can make mistakes just like everyone else. Don’t compound their mistake by just accepting the return they prepare. So many small business owners run to their accountant’s office and sign their return without even looking at it. Make sure your return is in your hands at least 5 days before it needs to be filed so you can review it and ask your accountant to make corrections if necessary. If a deduction doesn’t look right, or if you can’t understand why certain numbers are appearing in certain places, ask your accountant to explain it to you. It’s your money — make sure you keep control of it.
Tip #6 SET UP A SEPARATE CHECKING ACCOUNT FOR TAX PAYMENTS
Make taxes a priority. Take a portion out of your weekly income, as high as 35% at the beginning, and transfer it out of your business checking account into another account that is for tax payments only. If this can be an interest-bearing account, so much the better. You should only write checks for your estimated quarterly taxes and then final “catch-up” checks for your city, state, and federal taxes from this account. By setting aside money each week (or at least every two weeks), you will not be caught short on tax-day with no funds. Knowing that your taxes can be paid will allow you to focus on other areas of your business.
Tip #7 CONSIDER USING THE ELECTRONIC FEDERAL TAX PAYMENT SYSTEM
The EFTPS allows you to make electronic transfers directly to the IRS to pay your taxes. You can make the transfer as late as 8:00 p.m. Eastern Time the day before the tax is due. It takes a few weeks to get it set up because the IRS has to send you a Personal Identification Number (PIN) through the mail. If you generally pay bills through online services, the EFTPS makes paying your quarterly taxes a breeze. Saves you the cost of an envelope and stamp. In fact, if your business has an annual tax liability of greater than $200,000.00, you are required to use EFTPS. Go to www.eftps.gov for more information and to enroll. One major pain: the system requires you to change your password every 120 days. But it’s easy to manage for most small business owners.
Tip #8 KEEP UP-TO-DATE ON CHANGES IN THE TAX LAW
Commit to keeping abreast of tax law changes. If your accountant sends out a monthly or quarterly newsletter, sign up. Regularly review tax-related websites or business resource websites, like this blog, for updates on the tax law. Talk to other business owners about their tax challenges or tax triumphs. New deductions are introduced almost every year, and rules for other deductions are changed. You don’t have to obsess about the tax laws, but you should keep informed so you can take advantage of the laws that benefit you.
Tip #9 BE HONEST AND ETHICAL, BUT NOT INTIMIDATED
Reducing your taxes to the absolute minimal under the law is perfectly legal and acceptable. This is called tax avoidance. It’s a good thing to keep your money available to work for you and your family. On the other hand, falsifying information on your tax returns, failing to disclose income, or taking expenses as deductions that do not qualify is tax evasion. You could face serious criminal charges and civil penalties. If you feel a deduction is in a gray area, talk to your accountant or call the IRS. Just remember, it is only their opinion. You can talk to 10 different “tax professionals” and you just might get 8 different opinions. No one knows everything about your situation and how it fits in the tax code. If you are educated about the tax area you are questioning, you can make the call.
Taxes are a necessary evil when you own a small business. Getting educated about this important topic should be on your Must-Do list. Buying the
Small Business Owners Tax Guide
is a good place to start.
