Small Business Tax Planning Tips

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 and 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. At the start of the calendar year, accountants and bookkeepers are in high demand, so you will 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. 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.
  • 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 still 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 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

Capital costs are expenses for assets other than your inventory. 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 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 be sure that you’re sticking to a schedule for all these payments.

7. Ask your accountant to prepare a 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’re planning 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 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, your tax return will provide valuable information to potential lenders.

Importantly, your tax returns and internal balance sheets will need to show that your business has shown post-COVID recovery and proper use of pandemic relief-related funds. 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: 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 obtain financing in the next year.

When applying for financing, it’s better to show that your business has some net profit after all of the deductions have been considered. And, 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 profit in your lender’s cash flow calculations.

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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