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How a Small Business should Prepare for the Tax Season?

Preparing for the tax season is vital for small businesses and individuals. At the same time, it is difficult for the small businesses to file taxes. An early preparation for your business taxes can help minimize your tax burden, increase deductions and avoid end of the year scramble.

What is a small business tax return?

A small business tax return is similar to a personal tax return where businesses report information regarding a company's income, tax preparation services, tax deductions, and tax payments. All businesses are responsible for filing taxes. You need to file taxes annually with the IRS to calculate your business tax liability.
To prepare for an efficient  tax season, small business can do the following things:

  1. Organize important tax documents:

It is important to document the tax papers for efficient tax returns. You need to file the following documents:
  • Annual payroll records
  • Mileage logs
  • A complete and up to date trial balance 
  • Any distribution from equity owners
  • Any documents related to federal and state credits being claimed
  • Documentation of any federal or state tax payments made
  • Details of loans and advances 
  • Repayments between the business and owners 
  • Any payments made through the account or credit card that were not recorded in the company records
  • Name, addresses, FEINs of vendors pid that may need 1099-MISC issued
  • A copy of previous years tax return if you didn’t prepare the tax returns last year
  • Records of current year major assets purchase,disposals or lease arrangements. 
Also Read - Accounts Receivable
For efficient tax preparation, it’s important to document the above mentioned files from the beginning of each reporting year.

  1. Avoid common tax mistakes:

Small businesses have to make financial decisions and many small businesses make mistakes along the way. You can’t stop making mistakes but you can seek professional advice to avoid making errors and mistakes while preparing for the tax season. Professionals equip small businesses with the information and assistance needed to make informed, tax savvy decisions.

  1. Keep organized and updated throughout the year:

If small business owners keep themselves organized throughout the year, then preparing for the tax season becomes easy. Do the following three things to keep yourself financially updated throughout the year:
  • Keep track of which account paid which bill
  • Keep up-to-date accounting records such as bank records, credit card receipts, cancelled checks, invoices, business receipts, petty cash slips, professional services fees etc. 
  • Share responsibilities

  1. Use accounting software to keep track of the business expenses:

Many of the small businesses struggle with staying on top of their bookkeeping throughout the year. You have to make use of accounting software such as xero, quickbooks, freshbooks and  wave financial  to set yourself up for tax returns. The software makes it easier and ensures that you are keeping accurate records of business income and expenses.

  1. Hire an accountant:

Your accountant can do much more than preparing financial statements and filing taxes for your small business. Your accountant works with you throughout the year. They keep a track of income and expenses, they make sure you don’t have a cash flow problem, and they also monitor profits of your business. Accounting is important for the growth and survival of your small business. An accountant can keep up with the ever-changing tax code and advise you on the best practices.
Mistakes on tax returns can cause thousands of dollars in penalties and interest. To save yourself from IRS audit risk, find an accountant to help you with the taxes.

  1. Separate business from personal expenses:

Always get a separate bank account and credit card for your business and run business expenses through these accounts only. Otherwise, if the IRS audits your business and finds personal expenses mixed with business expenses. They could start digging on your personal accounts as well and no business wants to do that. Right!

  1. Be sure to file with state and local filing requirements:

Be sure you file your annual report with the Secretary of state- your status with the secretary of the state. Be sure to pay state and local taxes on time to avoid- penalties and interest.

  1. Be aware of all the tax deadlines:

You need to be aware of all the tax deadlines relevant to your business structure. You also need to be aware of all the state and federal tax
Deadlines.

Conclusion:

It may look tempting to do your taxes yourself, but it’s always better to seek financial preparation services. Tax advisors will help you plan for the future and develop tax saving strategies to help build wealth for your business.
Reference - https://ledgerbench.hatenablog.com/entry/2020/06/09/172456
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