Tax season can be a stressful time for a business. Depending on the structure of your business and financial circumstances, your company’s tax situation may vary. But every year, the obligation is due.
Paying taxes isn’t fun for anyone, but limit the stress by preparing for next year, starting now. A little preparation helps both founders and their businesses prevent multiple tax-related issues including:
- Over/under paying quarterly installments
- Scrambling to turn in the proper documents
- Finding someone to file for you, last minute
- Missing something that lands you with fees and other unpleasant surprises
Ready to prepare for next season? Here is a list of common sense and actionable steps.
5 Ways to Prepare Your Business for Next Tax Season
1. Use Deductions to Better Align Expenses
You’ve probably heard the old adage, “takes money to make money”. Thankfully, the IRS understands this and has over a dozen categories of deductible expenses for businesses. A dollar of qualifying expenses is a dollar you can write off of your taxable revenue.
While some expenses fall outside the deduction policy, many common purchases do count.
Take some time to understand these categories and use that knowledge to create an accurate budget. Proactively planning deductible expenses is a whole lot better than scrambling to find receipts at the beginning of the new year.
Better align expenses by:
- Using cash flow to purchase deductible expenses that will grow your business (beyond this year) and deduct those expenses for this tax year
- Reduce spending that you can’t claim
- Potentially find expenses that your company could use, but didn’t necessarily know it was a deduction (e.g. attorney fees)
2. Spend with Tax Credits in Mind
One way to lower the tax burden is via deductible expenses. Another way is to use incentives, like tax credits. While there are a number of credits, they do change over time. Typically, these credits fall into three categories:
- Employee-related: Healthcare, childcare, and employee enrichment credits are a few in this category.
- Energy/Environmental: Reducing carbon emissions, cleaner energy and other credits are available.
- Research and development: The R&D tax credit has potential for businesses looking to improve processes.
Note: It’s a good idea to have a conversation with an accounting professional who understands the changing landscape of tax credits.
3. Get and Stay Organized
You’ve got your categories set and understand potential credits for next year. Now, it’s time to keep track of those expenses. What’s the best way to regularly maintain your business finances?
Reporting and sound accounting. And it’s not simply expense reports.
- Monthly or quarterly P&Ls
- Rolling cash flow forecasts
- Regular reports for metrics that really drive your business (i.e. number of leads, revenue per client/employee, etc..)
Not only will these reports make filing next year seamless, you’ll also have accurate quarterly payments. Which leads to the next point.
4. Focus on the Accuracy of Quarterly Payments
Individuals often like getting a “tax refund” when they file. It’s like a savings account that the government holds for them. Talk to most financial advisors and they’ll tell you it’s a horrible idea to overpay for anything—including your tax obligations.
Pay too little and potentially get hit with interest and late fees. Too much and that’s cash you could’ve used to reinvest in your business (maybe leading to more deductions). But paying the right amount, that’s what any business wants.
No fees, and every dollar in your direct control.
The previous reporting tip goes a long way toward preparing your business for quarterly payments.
A forecast predicts revenue and detailed expense budgets show qualified upcoming deductions. Based on that data, your installments will be very close to the target—meaning you’ll avoid fees while keeping the right amount of money in your accounts.
5. Avoid Common Tax Season Mistakes
There are plenty of mistakes made when filing. For example;
- Not sending 1099s to contractors on time (or at all)
- Claiming improper deductions
- Miscalculating what you owe
Other mistakes happen throughout the year, well before you even file your taxes. Common examples here include:
- Poor expense records: Detailed records are necessary to make sure you’re not found without proper documentation for taking deductions.
- Not depositing withholding taxes: You’re required to withhold taxes for any staff working directly for your business (including yourself, if you draw a salary).
- Failing to report income: Buy and sell crypto with company money for a gain? Barter for something with a supplier? There are a number of ways that you can gain outside of direct sales. Those need to be reported, too.
Always Be Prepared for Tax Season by Partnering with Founders
Know qualifying deductions and align your expenses accordingly. Take advantage of every credit that makes sense for your business. Create meaningful reports to pay exactly what you owe to the IRS. And avoid common problems that plague so many startups and small businesses.
Partner with Founder’s CPA and our experts will help you plan your business taxes to avoid undue burdens and ensure you’re ready to file quickly all year round.
