Updated: Jan 26, 2022
Tax-time is upon us… and as small business owners, we understand exactly what you are going through at this time of year. There are records and receipts to check, forms to be ordered, mailed, and filed, and deadlines for all of them that need to be met. And it doesn’t matter whether you are doing the work yourself or hiring an outside person to tackle the headaches, tax-time can be an irritating, time-consuming, brain-busting, temper-testing mess.
But as a small business owner, you may also find that tax-time is a time to get your game-plan in order for the coming year. This is a good time to identify mistakes of the past and prepare a better strategy for the future. Like a New Year’s resolution for your business, this is your opportunity to create a plan of action for the coming year, and now is the right time to start putting it into play.
Growing your business is reliant on how well your business has performed and managed its expenses, especially if you have plans to achieve credit goals this year. We are not accountants, but we do have a few tips to get you onto the right track at tax-time…
RULE NUMBER ONE, of course, is always going to be honesty in reporting. The phrase I use the most is this: If you are having to look over your shoulder to see if you are about to get caught doing something wrong, you are probably doing something wrong. Unless you are a Fortune500 company with several Fortune500 attorneys in your corner, loopholes and shortcuts are not going to turn out in your favor. While the IRS is usually willing to work with you to fix common mistakes, their patience does have its limits.
KEEPING ACCURATE RECORDS means you need to do more than just stuffing receipts into a shoebox that you hand to your accountant at the end of the year. Whether using a $3.99 lined ledger or a $399.00 software package, you need to keep accurate records of every penny of income and expense. Not only does this help make tax-time tasks easier, but it will also help you to identify areas that need extra attention, plan for upcoming expenses, and budget for growth and investment. When applying for working capital loans or line of credit, your lenders may request financial statements that reflect your debt to income ratios, which come directly from your income and expense record-keeping.
COMPARE YEAR-OVER-YEAR tax returns as a way to measure growth or problem areas. Start-up costs may not be one of your major expenses this year, but you may need to focus the funds you used for those costs last year toward marketing your business this year. If you have plans to add employees or outsource certain projects, you will need to budget those expenses or look for outside funding to help you get to that goal faster.
IDENTIFY EMPLOYEES AND FREELANCERS as what they are. Many small business owners hire freelancers rather than taking on the added expense of permanent full-time employees, such as Social Security and Medicare taxes or providing health insurance. You will need to provide W-2 forms to employees and 1099s to freelancers by February 1st. If you are a freelancer and small business owner yourself, you’ll need to make sure you get 1099s from everyone you worked for the previous year. The IRS will be watching for (and matching) the 1099 copies it gets against the income you’ve reported. If you fail to include any income, you can bet you’ll be hearing from them.
USE AVAILABLE RESOURCES to get answers to specific questions. While the internet is a magical place filled with self-proclaimed experts, be careful who you trust for answers to specific questions. There are lots of websites and organizations available to help you get answers and training, such as IRS.gov and SCORE.org mentoring programs. Many universities have special get-togethers during this frantic time of year just for small business owners needing a little training and/or assistance.
MIND YOUR DEDUCTIONS all year long. Making sure to track deductibles needs to be managed all year long, not just when you are wondering if you will be able to deduct an expensive dinner with a colleague. Most small business owners are mindful of major expenses such as travel or equipment purchases, but tend to neglect smaller items that can add up fast, such as software, subscriptions, gifts, insurance premiums, and home office expenses. Keeping accurate notes of all expenditures will help you track these into your tax return at the end of the year.
DEDUCTING YOUR HOME OFFICE is like playing Russian Roulette with the IRS. Some say it opens you up to higher audit rates and other say it doesn’t. Just discussing it can stir angry conversation and yield a hundred different bits of advice. While home office expenses are easily defined, determining whether your home work space can be a legitimate deduction, or how much of the expense can be deducted, is not. According to the IRS, a home office must be a separate space used solely for business purposes, and that includes everything else inside that space, such as the computer, file cabinets, software, and furnishings. The IRS won’t know whether you have a separate office unless your return is audited and an IRS agent actually visits your home, but that would be a bad time to find out what you deducted was in error.
BUSINESS USE OF PERSONAL VEHICLES can be the hardest item to track into your tax return. While the IRS understands that owners use cars for personal and business use, they require you to keep a diary of how many miles you drive for business each day and calculate the deduction based on that amount. Most small business owners don’t keep those records as well as they should. Smartphone apps may help owners track business mileage separate from personal a little easier, but it is still going to require diligence, especially if you tend to make lots of short trips rather than long distance travel.
LESSON: Tax-time is a great time to get your game-plan in order for the coming year, to identify mistakes of the past, and prepare a better strategy for the future. Like a New Year’s resolution for your business, now is the right time to start putting it into play.