Business owners juggle many responsibilities. One of the most important is filing taxes every year. One way to make your business tax filing easier is to work with your accountant or CPA year-round, not just when they’re preparing your annual tax returns. Doing so can help you make other important financial decisions and reduce risk.
Tips to Make Your Small Business Accounting Easier
Nobody loves to file taxes, especially if they owe money to the IRS (Internal Revenue Service). But individuals and businesses must do so annually or risk significant financial penalties. With that in mind, there are ways to make your company’s tax preparation and accounting easier.
These include the following:
- Hiring the right accountant or CPA
- Claiming all income that you report to the IRS
- Keeping detailed records
- Separating personal and business expenses
- Knowing the difference between gross and net income
- Properly classifying your business
- Managing your company’s payroll
- Getting advice from an accountant on your business plan
- Taking advantage of capitalization rules
Hiring the Right Accountant or CPA
Your accountant or CPA Should do more than prepare your company’s tax returns and financial statements. They should also work with you year-round to help track income, expenses, and cash flow and monitor your gross and net profits.
Many business experts recommend that new business owners start working with an accountant or CPA early on. That way, the proper documentation will be in place from the beginning and can be updated as the company grows.
Claiming All Income That You Report to the IRS
Every year, the IRS receives a copy of the 1099-MISC forms that your business receives so they can match the income you have reported against what they know you have received. Therefore, ensuring these two figures are the same is essential. If the dollar amounts do not match, the IRS could consider it a red flag, and your company could be audited. The same rules also apply to state taxes.
Keeping Detailed Records
You must keep detailed records of all your company’s transactions throughout the year. If your record keeping is inadequate, you may miss out on tax deductions or put your business at risk of an audit from the IRS.
With that in mind, you should consider purchasing user-friendly accounting software that helps you keep track of all business income and expenses. This software can be worth the price if it highlights tax deductions you might have missed or saves your company from being audited.
Separating Personal and Business Expenses
If the IRS finds that you have mixed personal and business expenses on your tax return, you could face a penalty for these commingled funds. Therefore, you must have separate bank accounts for your business and personal matters. Likewise, you should also have separate credit cards for each.
Knowing the Difference Between Gross and Net Income
Your business will lose money if it costs you more to produce your product(s) or offer your company’s services than you charge. Unfortunately, business owners often don’t consider all the expenses they can face, such as taxes.
So, if the cost to produce a product is $80 and you sell it for $100, you will generate $20 in gross profit. However, if you owe $25 in taxes on each transaction, you will lose $5 on every sale. Given that, you must know all your potential expenses before setting the price of your products or services. Otherwise, the more sales you make, the more money you could lose.
Properly Classifying Your Business
There are several ways to classify your business, which can all have different tax consequences. The most common business structures include the following:
- Sole Proprietorship
- Partnership
- Corporation
- Limited Liability Company (LLC)
The sole proprietorship structure has one individual (or a married couple) running the business. Under the law, the company is automatically deemed a sole proprietorship if you launch a new business and are the only owner. Therefore, unless you require various licenses or permits for your business, there is no reason to register as a sole proprietorship with the state officially.
Partnerships consist of two or more owners. While an official partnership agreement is not required, it can be helpful to have one in place so that the business runs more smoothly. In addition, there are some similarities between sole proprietorships and partnerships. For instance, with multiple-owner businesses, the “default” mode is a partnership – and there is no need to register a general partnership with the state.
Another form of business entity structure is the corporation. A corporation is a legal entity that is separate and distinct from its owners. Under the law, a corporation possesses many of the same rights and responsibilities as individuals. For instance, a corporation can enter into contracts, borrow and loan money, sue and be sued, own assets, hire employees, and pay taxes. This is why some people refer to corporations as “legal persons.”
A Limited Liability Company, or LLC, is considered by many to offer the “best of both worlds” as compared to the other forms of legal entities. That is because LLCs provide limited liability from lawsuits and other debts while at the same time having less paperwork and ongoing requirements compared to C-corporations and S-corporations.
In addition, the owner(s) of a Limited Liability Company may choose how the IRS will tax the company. For instance, they may elect to have the Internal Revenue Service treat the LLC as a corporation or as a pass-through entity on their tax return.
Managing Your Company’s Payroll
Business owners are typically on the hook for making payroll taxes to the IRS. Therefore, it is vital that you properly manage your company’s payroll. It often makes sense to hire a reputable company to assist with paying employees and deducting the appropriate amount of tax.
Getting Advice from an Accountant on Your Business Plan
A good accountant can give you advice on growing your business. In addition, they may also help you determine how much to contribute to your retirement fund and whether or not you should take a bonus in some years. With the right accountant in place, you can better ensure that your money matters are handled properly.
Taking Advantage of Capitalization Rules
If you purchase equipment or property for your business, you might be allowed to take a deduction on the cost. Therefore, ensure the accountant you hire is familiar with the IRS capitalization rules.
Is Your Business Losing More That it Should Be to the IRS?
If you aren’t taking advantage of various business tax deductions, you could lose money unnecessarily to the IRS. Therefore, hiring the right accountant could save your company money now and long into the future.
