Are you ready for tax season? April 18 is approaching quickly, and many day-to-day decisions significantly impact your overall tax obligations. By planning early, your business can stay on top of the paperwork that comes in fast and furious in the early part of the tax year. 

Follow these tips to ensure that your small business is ready for tax season: 

  1. Gather All of Your Records
  2. Figure Out Which Tax Return Form to Use
  3. Bring All Tax Documents to Your Accountant
  4. Take Advantage of Any Eligible Deductions
  5. Consider an Extension

Step 1: Gather All of Your Records

The first and most important thing small businesses can do to prepare is to have all of their paperwork in order. If you have a proper accounting system in place, such as QuickBooks, it can help you keep track of this information much easier throughout the course of the business year, according to Haley Slade, CEO and Founder of Slade Copy House

“There are all sorts of great software out there to make sure your cash is reconciled, old receivables are written off, and give you the ability to go through your inventory and make sure it’s all accurate,” Catherine Doe, Partner at PKF O’Connor Davies, said. “It can also help you make sure that there are no additional deductions or things that need to be discarded.”

Supporting Documents

Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents. These include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. 

It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. 

According to the IRS, the following are some of the types of records you should keep:

Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. 

Documents for gross receipts include the following:

  • Cash register tapes
  • Deposit information (cash and credit sales)
  • Receipt books
  • Invoices
  • Forms 1099-MISC

Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item to show that the amount was for purchases. 

Documents for purchases include the following:

  • Canceled checks or other documents reflecting proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Credit card receipts and statements
  • Invoices

Note: A combination of supporting documents may be needed to substantiate all elements of the purchase.

Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item purchased or service received that shows the amount was for a business expense. 

Documents for expenses include the following:

  • Canceled checks or other documents reflecting proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Account statements
  • Credit card receipts and statements
  • Invoices

Note: A combination of supporting documents may be needed to substantiate all elements of the expense.

Travel, Transportation, Entertainment, and Gift Expenses
If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses. For additional information, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. 

Documents for assets should show the following information:

  • When and how you acquired the assets
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions taken for depreciation
  • Deductions taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale

The following documents may show this information:

  • Purchase and sales invoices
  • Real estate closing statements
  • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred

Employment taxes
There are specific employment tax records you must keep. Keep all records of employment for at least four years. For additional information, refer to Recordkeeping for Employers and Publication 15, Circular E Employers Tax Guide.

When Should You Begin Getting Tax Information Together?

The IRS announced Monday, January 23, 2023, as the beginning of the nation’s 2023 tax season and when they will begin accepting and processing 2022 tax year returns. Due to this year’s calendar, Americans have until April 18 to file. 

You should begin getting all of your business information together as soon as possible. The more organized and prepared you are throughout the year, the better off you will be come tax season. 

Pro Tip: “Make sure you’re organized and prepared before you start filling out your forms. The last thing you want is to be scrambling at the last minute trying to get everything done. Not only will this increase your chances of making mistakes, but it’s also going to waste valuable time that could have been spent doing other things like marketing your business or developing new products and services,” Annie Morris, Editor in Chief at Made in CA, said. 

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Step 2: Figure Out Which Tax Return Form to Use

Slade says that typically, small business owners and entrepreneurs use a sole proprietorship or an LLC (limited liability company) to run their business. If you are a sole proprietor or the sole owner of your LLC, meaning you don’t have any partners, you need to report all your business income and expenses using a Schedule C attachment to your personal income tax return. 

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Step 3: Bring All Tax Documents to Your Accountant

While you don’t need an accountant and can certainly file your taxes on your own through Turbo Tax or similar platforms, experts suggest that small businesses consult with a specialized tax accountant. This way, you can maximize your returns and take advantage of any deductions you may not know about. 

“The one thing small businesses shouldn’t do is not consult professionals,” Scott Goldberger, a principal with Kaufman Rossin, said. “They should seek competent legal counsel and the appropriate tax and accounting counsel to ensure they have the best tax outcome that they can have.” 

According to Brandon Reiter, CEO and Founder of Skyview CFO, LLC, here are some benefits to going through an accountant:

  • A professional accountant can get you more tax credits
  • They are up-to-date on the latest law changes
  • They can help you avoid any unnecessary audits or fines from the IRS 

“The tax code is full of traps for the unsuspecting, but it’s also full of opportunities for those who are willing to take advantage of them. A good tax professional will help you find those opportunities and make sure you’re taking advantage of them,” Morris said. 

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Step 4: Take Advantage of Any Eligible Deductions

Even though your accountant should be aware of any tax deductions you can utilize, it is also important for you to understand which ones apply to your businesses so you can better keep track of your documents in the future. 

“My clients are always worried about how they can reduce their taxes. The gate comes down on December 31, so if something hasn’t been paid by that point, it does not count as a deduction,” Goldberger said. “So understanding your method of accounting and what the cutoff period is are key factors.” 

According to Slade, these are some tax deductions that small businesses can take advantage of:

  • Home Office.
    You can claim portions of your home that you use exclusively for your business operations. 
  • Commercial Use of Your Vehicle.
    You can’t claim your commute between your home and your business, as well as traffic tickets or parking fees received during business hours, but everything else is fair game. 
  • Employee Expenses.
    Some of your payroll expenses may qualify for deductions. 
  • Legal Fees.
    Ordinary, necessary, and directly related to your business legal and professional fees may qualify for deductions. 

To see what deductions your business may have, print out your bank statements and highlight certain transactions with designated colors. This can help you organize your expenses and not give as much work to your account. The longer they spend on your tax documents, the more money you have to pay them. 

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Step 5: Consider an Extension

Like filing your individual return, you can request an extension from the IRS, which gives you an additional six months (until October 16) to file your 2022 taxes. To request an extension to file your federal taxes after April 18, 2022, print and mail Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. 

However, the extension only grants you a grace period to file your final return. You still must pay the taxes you believe that you owe. Even if you underpay, by filing an extension, this reduces the amount of money you need to submit when it’s time to file the final return. 

Covering Tax Obligations

Stephanie Scheller, Founder and CEO of Grow Disrupt, advises small businesses to set aside 15% of revenue monthly in a separate account that is untouchable except at tax time. This way, you never have to worry about whether you have enough money to pay the tax bill or not. 

“It’s a good idea for small businesses to set aside some money each month to cover their tax obligations. This can help ensure they have the funds available when it’s time to pay taxes, and can help reduce the financial strain of a large tax bill all at once,” Dennis Shirshikov, Head of Content at Awning, said. 

Scheller also advises to run tax strategy meetings quarterly. This allows you and your team to review what has come in, what is projected to come in, and where it’s going. Additionally, in this meeting, you can identify any tax credits that you should be pursuing, or purchases that would help limit your tax liability. 

“Always make sure to do your own research first. Whether you have an accountant or tax advisor, as a business owner, the biggest advocate for you is yourself,” Reiter said. “You can have as many professionals as you can hire, but the only person that will care the most about your business is you, so you have to do your own research, regardless of whether you hire a professional or not. Go to the IRS website, look at as many laws as you can, and read blogs — then consult with a professional.” 

Use these tips to help you prepare for this year’s tax season and more years to come.

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