Small Business Tax Planning: Key Points for 2021 and Beyond

business owner preparing her tax returns

Did you know that small business tax planning is something you should think about year-round? Having a great tax plan in place will not only ensure you’re prepared for tax season, but it’ll also help shape your business goals. When you’re ready to grow your business, you’ll want to have the right tax plan in place. The best part? It’s not too late to get started!

Take a deep dive with this guide to small business tax planning for 2021 and beyond. Stay organized with the checklist below to make sure you’re ready for the tax season ahead.

What you need to do now to prepare for your filings

Keep in mind that the work your accountant can do on your behalf is only as good as the information that 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 how to do that:

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. Here are a few questions you’ll want to ask as well as information you’ll need to share:

  • What do they need from you to help them file your return as soon as possible?
  • How things went for your business in 2021. If the pandemic continued to impact your business, let them know about any new debt you took on or any other extraordinary events that had significant positive or negative impacts.
  • Your plans for 2022, particularly if you anticipate needing to make major purchases or need additional funding for working capital.
  • Any questions you still have about your 2020 returns and anything specific to 2021 that may be different. This could include schedules that were specific to last year or for 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 (which are due on January 31st) for all independent contractors and suppliers that were paid more than $600, as required by the IRS. As the 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, get them now 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 out your capital costs from ongoing operating expenses

Expenses for assets other than inventory are considered capital costs. They should be reflected on your balance sheet, 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 unclear about the difference between taking a salary or a distribution, ask your accountant to explain to 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 be sure that you’re sticking to a schedule for all these payments.

7. Ask your accountant to prepare a balance sheet for 2021 (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’re planning to apply for new funding in 2022, 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 are recorded, too.

What your accountant will 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 documentation available for lenders, should you need additional financing. Remember, delaying filing doesn’t mean that you’ll owe less (and can result in penalties that will cost you more), so don’t put it off.

What lenders want to see and how tax filings can provide the information

If your business is applying for more funding in 2022, your tax return will provide a lot of valuable information to potential lenders.

Importantly, your 2021 tax returns will need to show that your business has gotten through the worst of the pandemic’s challenges and shows signs of post-COVID recovery. You’ll also need to show lenders that your business can take on and repay new debt. Keep this in mind when discussing your business deductions with your accountant.

Pursuit can help

Pursuit offers more than 15 loan options that help business owners get the funds you need including startup businesses, businesses in industries that are hard to fund, and 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 filings done, and get in touch with us today.

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