Being a business owner is difficult enough without adding the complexity of filing your company’s annual taxes. It’s essential to work with your accountant during the whole year, not just when it’s time to prepare your organization’s tax return. Making financial decisions without consulting an accounting specialist or financial adviser can increase your odds of losing more money in the long term.
Keep on reading to discover the six best practices for small businesses when it comes to tax returns and bookkeeping.
1. Claim all income that is reported to the IRS
The IRS receives a copy of the 1099-MISC forms you get so they can check if the income you’ve reported matches the amount you’ve earned. Remember that income reported to IRS should always match the amount stated in the 1099s you get. Avoid doing it means putting yourself in danger of receiving a penalty from The IRS.
2. Hire the proper accounting specialist
Your accounting specialist should be able to do more than financial statement preparation and bookkeeping. If it’s all your accountant does, then he or she isn’t the right choice for a small business. Consider hiring the best tax accountant that will work with you throughout the year to monitor earnings and expenditure. This is necessary to ensure that your company doesn’t have a cash flow problem and to track your gross profit and net income. Make sure to work with your accounting specialist since the first day of starting your business, not just at the end of the tax year.
3. Keep proper records
Maintaining your records thorough and precise during the whole year is crucial to file a correct tax return. Improper bookkeeping puts you at increased risk of failing to use beneficial deductions. What’s even worse it can increase your odds of an audit. Experts recommend all small business owners invest in a basic type of accounting software because it’s typically user-friendly, cheap, and helps monitor all income and expenditure.
4. Separate personal and business expenditure
If the IRS performs a financial inspection of your business accounts and finds your organization’s expenses are mixed with personal expenses, it may start an audit of your personal accounts due to commingled money. This may happen regardless of whether you’ve reported business expenditure properly. Make sure to get a different bank account and credit card for your business and run only your company’s expenses via these accounts.
5. Classify your business properly
If you fail to correctly classify your business, you may end up overpaying your taxes. Choosing to classify your organization as either an S Corporation, C Corporation, Single Member LLC, Sole Proprietor, Limited Liability Partnership, or Limited Liability Company can result in different consequences for your taxes. Make sure to consult your accounting specialist or an attorney to identify what’s the best way to classify your company.
6. Consult your accountant about business planning
A proper accounting specialist should give you advice on how to extend your business. Seek his or her advice to identify which amount to donate to your retirement fund and whether it’s necessary to take a bonus or delay it a year. Your accounting specialist can also determine if purchasing a small space for your store or organization, rather than renting, may save you money.
The bottom line
If you’re running a small business and wish to cut down your tax bill, use all available deductions, and grow your company, consider following the aforementioned tips. Also, consider hiring a professional accountant who will help you with keeping your records in order, avoiding an IRS audit, and planning your business.