8 Tax Tips This Accountant Wishes Small Businesses Knew
Getting ready for tax season as a small business can be a complete nightmare or a total breeze. The difference? How you prepare. Many small businesses will realize they are in completely over their heads and try to hire an accountant come January – a strategy that is super risky.
Most accountants and bookkeepers will not accept a clean-up job come January because it is a huge amount of work and they are busy helping existing clients prepare for taxes. If you are able to hire a professional, be prepared to pay.
The solution? Don't wait until January, hire an accountant now!
In the meantime, here is my wish list of what small businesses should do to properly prepare for tax season.
1. Get the basics right: Track your expenses with a software like Quickbooks or FreshBooks (please DO NOT use Excel). Keep separate business and personal bank accounts and credit cards.
This seems like obvious, small stuff but I am always surprised by how many small business owners fail to do these basic steps. Why is Excel so bad? Excel is super manual, so there is way more room for error. I’ve seen Excel sheets that have incorrect formulas or come to find out later that the numbers were typed in incorrectly and in some cases, that makes a big difference.
Software like Quickbooks or Freshbooks connects directly with your bank account and makes it really easy to pull in, itemize and organize all your business expenses. The opportunity for error is much, much lower.
Also, you don’t necessarily have to open a business bank account if you are worried about fees. Just make sure you have a completely separate bank account for business expenses and use a separate bank account for personal expenses. Connect all of this into your bookkeeping software.
I cringe each time a client gives me a literal shoe box of paper receipts for an entire year of expenses. Especially when receipts are a mix of personal and business expenses because the client puts all everything on one credit card.
2. Track your income correctly.
If you have an LLC or sole proprietorship, make sure you are not counting any financial contributions you make into the business or any loans as revenue. Owner contributions and loans aren’t taxable. I am always surprised by how many small business owners will contribute, say, $5,000 to their business and categorize that as revenue. That means Uncle Sam is taking a chunk of that $5,000, and that is bad! Income should only be actual sales to actual customers.
3. Claiming home office expenses does not make you more likely to get audited, but make sure you track and document everything.
If you work out of your home on a full-time or part-time basis, you should make sure you are taking that deduction based on the right formula, which is based on the square footage of your office in relation to your whole house.
There is a rumor going around that if you claim a home office expense, that you are more likely to get audited and that is simply NOT TRUE! I do caution that if you have a mortgage that you are already deducting on your personal taxes, you cannot double dip and also deduct your mortgage amount or interest on the home office deduction. You can however as a renter deduct your entire rental monthly payment. You should also keep track of your other housing expenses, like utilities, cleaning, landscaping, pest control, HOA, because you can deduct a percentage of those expenses. Just make sure you save copies of all your bills for these items so you have documentation.
4. Track your car mileage throughout the year with an app like MileIQ to make it easy.
Driving to client meetings, running errands for your business, like going to the bank or basically anything that you would not otherwise do unless you had your business counts as mileage. Unless you are the most organized person on the planet and can keep track of miles traveled in a manual log, use an app like MileIQ. It’s easy and you can swipe left or right for personal or business trips. MileIQ will also create a log of all business trips for you to make it super easy. Unfortunately, though, if you drive every day to an office or co-working space, that is considered commuting and not tax deductible.
5. Don’t wait until the last minute for employee forms like 1099s.
If you have payroll, make sure you have all the payroll reports from your payroll service or Quickbooks so you can give all your employees the proper forms. All your 1099 forms need to be filed by January 31st – this is for any contractor you have paid more than $600 (like lawyers, bookkeepers, consultants). Failing to do this will get you in trouble down the road. A great option for small businesses is to have your accountant or bookkeeper do your payroll or use a software service like Gusto or Patriot.
6. Buying expensive things at the end of the year is not always a good idea depending on depreciation.
I often see clients make a big asset purchase, like hardware, at the end of the year to get their cost basis up (i.e. they didn’t spend enough during the year and as a result, will owe more in taxes). Your tax preparer will need to track these big asset purchases separately to account correctly for depreciation. Make sure you keep track of when you purchased the asset, the purchase amount and the date it was placed into service. The full cost of the item may not be fully deductible in that calendar year.
7. The new tax law has changed the way entertainment expenses can be deducted.
Bad news with the new tax law: You can no longer deduct entertainment expenses. This includes items like event tickets, golfing, sporting events, baseball games or client events. Previously, businesses could deduct 50% of these costs.
The amount you can deduct for employee meals has also changed. Previously, you could deduct 100% - this includes lunch and learns, late night meals, working lunch meals. Now you can only deduct 50% of these expenses.
Your tax preparer should know this and make the proper adjustments, but it’s important that small business owners are also aware to make sure their taxes are done correctly and for net income budgeting purposes.
8. Lastly, make sure your tax preparer has your tax returns for last year – ideally the last two years.
Know your business’s status (are you an LLC, S-Corp, Sole Proprietorship, partnership), have your EIN number and make sure your tax preparer has a copy of last year’s tax returns. Some things translate year-to-year, like net operating loss.
Finally, the last bit of advice is to be patient with your tax preparer and don’t wait until April 14th or March even! Get on your tax preparer’s schedule ASAP and start sending him or her your documents in January, even if it’s piecemeal.” This means start cleaning up receipts now and if you are going to hire a bookkeeper, do so today – BE PROACTIVE!!