Tax Season: Essential Preparation Steps for SMEs

Let’s face it: accounting can be absolutely daunting and time-consuming. The National Small Business Association (NSBA) estimated that a third of business owners spend over 80 hours (or two weeks of full-time work) on sorting out federal taxes.

Unfortunately, we cannot simplify the tax legislation or make you love the numbers (and get a CPA). But we can make you better prepared for the upcoming tax season.

How to Prepare for the Tax Season: Essential Tips

Start preparing for tax season in advance. Yes, we mean that. Go on and mark your calendar right now with the key tax return dates for 2018 if you are based in the US:

  • April 15, 2019: Sole Proprietorship and Single-member LLC should file tax returns on Schedule C (with the owner’s personal tax return).
  • March 15, 2019: Partnership returns on Form 1065 with Schedule K-1 for each partner must be filed.
  • Again, March 15, 2019: Multiple-member LLC returns on Form 1065 with Schedule K-1 for each member are due too.
  • March 15, 2019: mail your S corporation returns on Form 1120 S.

Be sure to also check the official IRS calendar for business and self-employed. It provides additional important due dates and actions you need to take every month to stay on top of your accounting and tax planning. You can also set up automatic calendar reminders through their website.

1. Get Organized Early

Because you know that scrambling to get your paperwork together the very last moment will likely result in some mix-ups: you will forget to claim some tax deductions (more on this later!); spend a night trying to get atop of all your invoices and feel miserable in a multitude of other ways.

Accounting and tax planning are essential components of effective cash flow management. By neglecting them, you are deliberately hindering your business growth and revenue. So yes, start planning way ahead – preferably in December-January.

The best way to do your taxes is to keep an ongoing, up-to-date record of the following information:

Bank and credit card statements. These will be demanded both by the authorities and by a tax preparer you may want to hire. They will want to ensure that your balance sheet numbers match the bank balances – a quick crosscheck to ensure that all the expenses and revenues have been recorded in the bookkeeping. So make sure that you save a copy every month, and double-check it for accuracy.

Out-of-pocket expenses. Don’t toss away those receipts. Put them in a literal shoebox or digitize them and store in a dedicated folder online. Also, pay attention to the personal account/business expense conundrum.

Because even if you used a personal card to order office supplies from Amazon, you can still qualify those expenses as a legitimate tax deduction. But hey, it’s easy to miss out on these ones! So along with checking your business accounts, audit the personal ones as well to capture your business purchases.

How do you claim them? Two options are available:

  • If you found some business expenses before the end of the tax year, write yourself a reimbursement check using your business bank account and record those expenses that way.
  • If you noticed them at the beginning of the new year, fret not either. You can still capture them in your bookkeeping by debiting the appropriate expense account and crediting an equity account.

NB: Make sure to “weed out” any personal purchases that you have accidentally made with a business card. If you noticed some of these, your best option is to enter the transactions as a credit to your checking or credit card account and a debit to either a loan to business or equity account.

Working from home? Deduct your home office. IRS proposes two ways to file for home deductions:

  • Simplified option – deduct $5 per square foot of home used for business (capped at 300 square feet) + home-related itemized deductions.
  • Regular option – more maths involved. You will need to figure out the percentage of your home devoted to solely to your business activities and then determine the actual expense of their home office (e.g. 30% of utilities). The expenses you can include are mortgage interest, insurance, utilities, repairs, and depreciation.

But don’t get carried away here: your deductions in sum cannot exceed gross income from business use of home minus business expenses.

Receipts for asset purchases. Bought a new office chair? Upgraded your laptop or your car? You can claim some money back for those purchases, as long as you kept all the receipts.

2. Calculate Your Total Gross Income For The Year

Again, the best way is to start doing this a few months in advance. It’s always easier to throw in just a few more records, instead of going through a year-worth pile of statements, bills and invoices.

Here’s exactly what you need to capture:

  • Earning statements, gross receipts, sales records.
  • Cost of goods sold (including inventory, purchases, and materials, if you run a product company)
  • All business expenses (including utilities, marketing, travel, bank/payment processing fees, insurance, supplies, interest etc.)
  • Loan agreements (if any)
  • All purchase documents for larger assets (above $2,500).

That’s a lot of paperwork…but it’s all essential to get an accurate business profitability number and thus estimate your taxable income. There’s not much fun in reconciling all those papers, so you may want to look into some accounting software to help you out. There are a lot of affordable options on the market, designed specifically for SMEs.

3. Take a Closer Look at The Tax Forms

You need to see the face of what you’re up against!

As a Sole Proprietorship or Single-member LLC, you will need to file a Schedule C form. It reports all the income and expenses of your company. Considering that you are self-employed, you will likely need to file a Schedule SE form too (regardless of whether you are paying yourself a salary or not). This one will determine what taxes are due on your earnings.

If you are making regular payments to vendors or sub-contractors, you will also need to file form 1099. It applies to any person or business you have paid over $600 to during the year. The deadline for filing this form is January, 31st.

Schedule C form will likely take you the most time to complete, so let’s dwell on it a bit further. It includes five key sections:

  • Gross Income – The grand total of income generated from selling products/services to your customers.
  • Expenses – All of your outgoing business expenditures: rent, utilities, contractors, employee wages, supplies, insurance and so on.
  • Cost of Goods Sold – Fill in only if you have inventory or manufactured, purchased, or sold products that generated revenue.
  • Vehicle Deductions – Fill in if you want to deduct business-related vehicle expenses or mileage.
  • Other Expenses – Miscellaneous expenses that were not covered in the general expense section.

4. Maximize Your Deductions at The End of The Year

Tried filling out that form and didn’t fancy the final tax number? Congrats! You had a very successful business year then.

But hey, it doesn’t mean that you cannot legally trim the impending tax bill. Consider either of next small business accounting tips for that:

  • Try to reschedule major invoices and contracts for January. Yep, it’s not a viable long-term solution, but who says you cannot do the same for next year’s tax season?
  • Ramp up your expenses. Again, you can move larger planned expenses to December if that’s possible to even out your score.
  • Make a charitable contribution. Support a good cause and lessen your tax burden – it’s a win-win.
  • Leverage your capital cost allowances to account for the depreciation of business-related equipment like vehicles, computers and machinery.

5. Prepare Your Tax Payment Plan

As a business, you are not obliged to settle the tax bill at once. Instead, you can choose from the different payment options that suit you most:

  • Paying in 120 days or less (short-term payment plan): eligible if you owe less than $100,000 in combined tax, penalties and interest.
  • Paying in more than 120 days (long-term payment plan): eligible if you owe $50,000 or less in combined tax, penalties and interest, and filed all required returns.
  • Give in and pay in full at once.

Mind that payment plans decisions will be made based on your specific financial circumstances. So make sure that you have funds set aside every month for when the tax day arrives.

6. File The Forms

Once you are done with filling all the form and figured out all the other practicalities, get ready to file everything. You can do this both online or the old-fashioned way using snail mail.

To recap, you should file all your documents by April, 15th (if you are a Sole LLC owner). But if you are short on time, you can ask for a six-month extension. If granted, your deadline would move to October 15th. But hey, we hope that you will file everything on time this year by sticking to our accounting tips!

And if you happen to need some attractive invoice templates for the upcoming year, we have you covered as well!

Photo by Tevarak

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