5 Small Business Tax Planning Tips
Tax season can sneak up on small business owners, and advanced planning helps to limit the stress of dealing with complications as deadlines loom like an April storm cloud. To help stay on track, here are five tax planning tips for small businesses.
It's Never Too Early to Start Thinking about Taxes
Rather than letting receipts and financial paperwork build throughout the year, set aside time to tackle financial recordkeeping tasks on a weekly or monthly basis. Label and file expense receipts properly to ensure they're classified correctly for tax purposes. Also, it's never too early to start thinking about how you will be preparing your taxes. Interview tax accountants prior to year-end to gain a sense of the complexity of filing requirements for your business and find out how professionals can help. Waiting until the height of tax season may limit your options if professional help is required. When going the tax software route and self-preparing returns, research the different programs on the market before making a final selection.
Select a Method of Accounting
Before filing tax returns, many small businesses must choose between the cash or accrual methods of accounting. Businesses preparing their own tax forms may prefer the cash method of accounting because it's often easiest. However, there are advantages to using the accrual method of accounting in that it matches expenses and revenues. The accrual method focuses on reporting earned income, not just cash received. If you intend to engage tax preparation assistance, don't forget to inquire about the benefits of accrual accounting for tax purposes.
Find Out Which Forms to File
Tax filing requirements depend on a small business' legal structure. Sole proprietors can report income or loss from a business on Schedule C of their personal tax return. Limited Liability Companies (LLCs), often formed to separate business from personal assets, require separate tax returns. The forms vary based on the LLC structure, such as a partnership or corporation. State and local tax requirements should also be researched during the small business tax planning stage to ensure the proper data is compiled before filing deadlines.
Research Possible Tax Credits
Many small businesses qualify for tax credits and these change from year to year. Basic tax credit information along with other tax planning tips is often built into tax preparation software, but taking advantage of these tax credits requires upfront planning and work. There are thousands of federal, state, and local credits, all with unique requirements, so it is always a good idea to work with a tax professional or tax credit service provider who can work with you to identify the credits you qualify for and can assist you in complying with the requirements of the program.
Consider Implementing an Online Accounting System
To help with bookkeeping in advance of tax season, consider using online accounting software. Online software tracks sales taxes which must be remitted to the government. Accounting software also generates financial statements and other reports which tax professionals can use to prepare business returns. Further, online accounting systems offer the capability to grant access to external accounting and tax professionals, avoiding the need for small companies to manually compile data for filing purposes.
This year, don't let tax season sneak up on you again. Advanced planning, research, and the use of an online accounting system help increase both the accuracy of small business tax returns and the efficiency of the filing process.