Tax season can be stressful for many entrepreneurs. Most businesses stress over making solid profits, but if too much profit is made, then they stress over how much they might pay in taxes on those profits.
Here’s another oldie, but goodie to get your business ready for the new year. I originally published it early last year, but it deserved a refresh and reshare as we enter a new year with our new goals and new energy!
Imagine if tax season was a smooth and easy process you finished early every year and with barely a second thought.
What if you already had a plan in place (before Dec 31) to pay the minimum in taxes (legally) and were on track to achieve that plan?
What if you knew your records were so clean that the IRS agents would be high-fiving and smiling because you had your stuff together (okay, that’s probably not a thing, but you get the picture) – let’s just say your chances of getting extra scrutiny from the IRS are minimized.
This doesn’t have to be only in your imagination. It’s all very possible and within reach.
As I am writing this blog, it’s almost tax season again. Anxiety is rising among many small business owners because they fear:
- How much they will owe, OR
- Whether they paid enough (or should have paid) estimated taxes, OR
- Whether they did things incorrectly (thus inviting unwanted attention from the IRS), OR
- The process of trying to find all the documents and remember those other items purchased on their personal credit card (they are not alone…and neither are you).
Owning a small business can give us entrepreneurs great freedom to be our own bosses, make the big decisions, not have to answer to anyone else, and decide our own destiny. But every year around March and April, we have to answer to a higher power, the IRS.
If you own a business, you may think it’s completely normal to be in a state of stress and panic, trying to pull everything together in time for tax season.
It doesn’t have to be that way. I’m going to break down how you can make this time of year much easier and less stressful from now on.
No matter what time of year you read this blog, you can start using these practices to position your business (and your sanity) for a smooth tax season.
ESTABLISH A TRAIL
The IRS requires supporting documentation for all business expenses. Full stop.
What that means is you need documents to show what was purchased, when it was purchased, and from whom it was purchased. To answer a question I receive often—no, a bank statement does not count as supporting documentation. If you want to get and keep all your deductions, you have to start by keeping all of your receipts and invoices.
How do you keep all those paper and digital records without being overwhelmed? This part doesn’t have to be hard.
If you love paper, you can simply keep receipts in an expandable file folder by month. You just have to make an effort to actually put them there.
But, if you are done with paper and have stepped into the digital age, use an app like
Hubdoc or the ones within QuickBooks and Xero to capture them digitally from your phone. For digital receipts and invoices, set up automatic forwarding within your email system to these same apps. It’s that easy.
Don’t or Stop Co-Mingling Your Business and Personal Finances
Using your personal funds to purchase items for your business, or vice versa, can get really messy, really fast. It’s easy to do, but absolutely NOT beneficial to you or your business and can cost you much-needed deductions.
Remember when you purchased that new laptop charger? Did you use the business Mastercard or your personal VISA? Where’s the receipt? When exactly did you purchase it? If you used your personal credit card, did you pay yourself back? When?
See how quickly that can devolve down a deep rabbit hole? Don’t do it! You will spend way too much time searching for receipts or lines on credit card statements to figure out what happened. Not to mention that completely forgetting these items will cost you small business deductions that add up in the end.
Bottom line, keep the business and personal expenses SEPARATE!
KNOW WHAT’S DEDUCTIBLE
The more you understand what is potentially deductible, the better you can help your tax pro help you lower your tax bill. This one I cover in more depth in my blog, You
Can’t Take a Deduction if You Don’t Know What to Deduct. I break down specific areas that entrepreneurs should be aware of as far as deductions go.
You can also get it straight from the horse’s mouth! The IRS details business expense deductions here.
USE SOFTWARE
I recommend entrepreneurs start with an Excel spreadsheet to keep track of expenses before officially starting their business and/or in the initial stages of starting up.
I also recommend all businesses use financial software such as Xero or QuickBooks as soon as possible. More complex businesses (multiple employees, inventory, expensive equipment, loans, etc.) should begin utilizing this software on day one. Why? Because the chances for error are greater for these businesses and software will help reduce that probability. Errors not only keep you from tracking your business health and performance, but they also keep your tax pro from being able to accurately complete your taxes.
Software will also make the process smoother and easier by automating and streamlining many mundane processes. All of this saves you time and money down the road.
KEEP UP WITH YOUR BOOKKEEPING
Accurate bookkeeping is not only the foundation of a profitable business, it is also the foundation for identifying ALL your possible deductions and minimizing your potential of
being audited. The truth is if you approach any tax professional at the last hour with a messy set of records, they will:
1.) Charge you MUCH more because they have to fix the mess (if they don’t, you can bet some things got missed)
2.) Likely not find all of your deductible expenses because there isn’t enough time to find them amidst the mess.
I suggest you not let your bookkeeping get behind and make sure it is done accurately. Whether you do it yourself or not, set aside time each week for financial tasks.
Also, if you do choose to DIY this task, be sure that you learn the rules and understand the tools. That means take the time to first learn basic financial accounting, then learn how to properly use the accounting software (Xero, QuickBooks).
Ignoring these steps will result in errors and cost you money.
MEET WITH YOUR TAX PROFESSIONAL MORE THAN ONCE PER YEAR
It is impossible to strategize backward. For this reason, it is good to check in with your tax pro more than just at tax time to ensure you develop a plan and are staying on the plan. If not, regular communication will allow you to make adjustments that work in your favor.
If you would like to experience your easiest tax season ever I can help! While we don’t do taxes, we work with our clients to make the process leading up to tax filing smooth, non-stressful, and easy. We will even connect you to one of our highly experienced tax professional partners. Let’s schedule a Discovery Session.
If you’ve enjoyed this blog, and you’d like some additional tips to help your business be better or to help you be better at business you MUST get a copy of my FREE video training guide to learn how to stop the money leaks in your business. It’s called Stop the Money Leaks In Your Business: The 5 Money-Related Mistakes Entrepreneurs Make and How to Fix them. In it, I share the top 5 mistakes entrepreneurs make that keep them from realizing their full profitable potential. This is in fact where I start with my new 1:1 clients. Grab a FREE copy of the guide by going to the link above.