As a small business owner, you already have a lot to juggle – from running your day-to-day operations to managing your financials – so when tax season rolls around, it can feel daunting. The good news? With these tax tips for small business, you can stay organized and make the tax season less stressful, so you can focus on your small business growth.
What are the tax tips for small businesses?
Keep in mind that the work your account can do on your behalf is only as good as the information you supply. Keeping accurate and organized books and providing that information to your accountant earlier in the tax-filing period will streamline the process for everyone.
Here’s the seven strategies:
1. Schedule a conversation now with your accountant or tax preparer to set expectations
It can be as simple as a phone call or email to get the ball rolling. At the start of the calendar year, accountants and bookkeepers are in high demand, so you’ll need to start early. Here are a few questions you’ll want to ask, as well as information you’ll need to share:
- Ask your accountant or bookkeeper what they need from you to help them file your return as soon as possible, then gather those documents for them.
- Tell them how things went for your business in the last year. Let them know about any new debt you took on or any other extraordinary events that had significant positive or negative impacts.
- Discuss your plans for the year ahead, particularly if you plan to make major purchases or need additional funding for working capital.
- Come prepared with any questions you have about your previous returns and anything specific to this year that may be different. This could include schedules that were specific to last year or this year, or how business tax returns (for example, K-1s) feed into your personal tax return
2. Get your internal bookkeeping in order
Prepare your 1099 reports for all independent contractors and suppliers that were paid more than $600, as required by the IRS. As a business owner, it’s your responsibility to request employer identification numbers (EINs) or social security numbers from your vendors and independent contractors. If you’re missing any of these, it’s important to get them as soon as possible so you can issue and file your 1099s on time.
3. Update your bookkeeping
Make sure your financials reflect transactions through December 31 so you can generate a preliminary profit-and-loss (P&L) statement. Review your expense categories to ensure they’re correct and in line with the prior year. Using a bookkeeping system like QuickBooks can help with this by maintaining accurate records and producing quick reports for you to use.
4. Separate your capital costs from ongoing operating expenses
Capital costs are expenses for assets other than your inventory. These should be reflected on your balance sheet, and not on your P&L statement. Additionally, ensure that you have the breakout between principal and interest on any loan payments.
5. Identify your distributions
Owner distributions are often recorded as an expense in your bookkeeping system but they should be recorded on your balance sheet. If you’re unsure about the difference between taking a salary or a distribution, ask your accountant so you can determine which is better for your business and entity type.
6. Stay on top of tax liabilities
Make sure you know the requirements for making estimated tax payments. This includes payroll, sales, and income taxes for both your business and personal returns (if they’re separate). You’ll want to ensure you’re sticking to a schedule for all these payments.
7. Ask your accountant to prepare your balance sheet for the year (whether or not the IRS requires it)
This step is particularly important if you’ve taken on any new debt or other liabilities. If you plan to apply for new funding in the year ahead, lenders will require it as part of your application. Make sure that any additional equity that you or other owners have invested in the business over the course of the year is recorded, too.
What will your accountant need from you?
The most important thing you can do to help your accountant is to stay in touch. Having a conversation now, before you meet to do your taxes, means that you’ll have the information ready for a timely filing. You’ll also have the documentation available for lenders if you need additional financing. Remember, delaying filing doesn’t mean you’ll owe less (and can result in penalties that will cost you more), so don’t put it off.
What do lenders want to see from your taxes?
If your business is applying for more funding, your tax return will provide valuable information to potential lenders. Your tax returns and internal balance sheets will show lenders that your business can take on and repay new debt.
Keep this in mind when discussing your business deductions with your accountant: While it may be tempting to negate all of your business’s tax liability by using deductions to show a loss for the tax year, that strategy could negatively impact your business’s ability to secure financing in the following year.
When applying for financing, it’s better to show that your business has some net profit after all the deductions have been considered – not all business tax deductions are equal in the eyes of your lender. Most banks and alternative lenders will add the following deductions back into your business’s net profits when considering your ability to repay a loan:
- Interest
- Income taxes
- Depreciation
- Amortization
If you claim other deductions on your business tax return, they won’t be added back into your business’s net profits in your lender’s cash flow calculations.
Pursuit can help
Pursuit offers more than 15 loan options that help business owners in New York, New Jersey, Pennsylvania, Connecticut, Illinois, and Delaware get the funds you need, including startup businesses, high-risk industries, and for business owners who may not meet all of the criteria of conventional business loans.
We want to help you too, so get your financials in order, get your tax fillings done, and get in touch with us today!