Tax season can be rather stressful for many small businesses. You may be too busy trying to grow your business to realize that another financial year is coming to a close and your books are not in order. Your receipts are probably stashed in various places and you definitely cannot remember all the expenses your business has incurred in the past year.
To make this period more manageable, here are the top five things you should do before handing over your books to the tax man.
- File for an extension
When you know that you haven’t been keen on your records all year and your books are a mess, you may need some breathing room. Trying to sort a year, or even a couple of months worth of taxes in a short span of time can toll on you mentally and physically. It also almost always guarantees mistakes while filing your taxes. You can file for an extension even before tax day if you want, giving yourself an extra six months to file returns. You can also use this time to identify more tax breaks.
However, filing for an extension does not mean that you can go ahead and delay your tax payment. You are still required to pay all your taxes before tax day.
“Failure to file” comes with its own penalties, thus if you definitely know that you cannot meet the deadline, file for an extension, pay what you believe you owe and file your return. You can always amend your return at a later date, but it is usually better to do it correctly the first time as this can be a tedious process.
You should note that if your income is higher than what you stated, or your expenses lower than what you estimated, you will need to pay the amount owed or face penalties and interests when you finally pay up.
- Gather all your financial records
Compile all documentation related to your business activities. This is the time to crack open your drawers and files looking for receipts, purchase documents, bank statements, paid bills and canceled cheques. If your business is small and you still have some expenses on your personal credit cards, you will need to document them. You should also be able to prove that these expenses were directly related to the business.
- Sort and group all fiscal documents
After you have gathered all your records, they should all be sorted and clustered into different categories. Examples include payroll, medical expenses, auto expenses, utilities, office supplies, charitable donations, tax-deductible sponsorships and income from all sources. Doing this makes it is easier for the person preparing the taxes to feed this data into a spreadsheet and identify which tax deductions you are eligible for.
- Ensure all income is documented
For small business owners, tracking income from all sources can be rather tricky. All income related to the business should be stated clearly and without error. If you happen to be audited by the International Revenue Service (IRS) and they find out that you had not declared some of your income, this can land you in trouble. The IRS typically won’t bother if you have reported your business expenses correctly, but they can investigate incorrect reporting of income. This is a situation you do not want to find yourself in.
- Learn from your mistakes
After tax season is behind you and you can finally breathe comfortably, you need to identify ways to prevent the rush from happening again. You definitely do not want to go through the same situation next year.
You will need to set up systems that allow you to keep better books. Start off by setting a filing system for receipts. You can choose to make this a hard-copy system or a system for scanning and sorting receipts into digital copies. This will save you a lot of time and energy.
Consider purchasing and using accounting software like Quickbooks, which can help you track all your finances and stay organized so that you are prepared for the next tax season. You can use such software for expense tracking, payroll, invoicing and even to manage and pay bills for small business. Keep in mind that the tax code varies from year to year, therefore, your tax software should be updated to reflect the current tax code.
This is also the time to scout for and hire a tax professional to consult with regard to proper practices and to offer you guidance on what deductions you might be eligible for.
By employing the above strategies, you can gracefully go through this tax season without too much strain and ensure that you are not caught unaware by the next tax season.
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