Self-Employed & Sole Proprietor Business Solutions

Looking to maximize resources and execute business functions more efficiently? While it can be challenging, this article offers some starting points.

Knowing how to improve efficiency in your business is a key factor in any company's strategy for growth. When inefficiencies exist, productivity can suffer, creating a ripple effect throughout the organization that can impact leadership, employees, and customers alike.

Definition of Business Efficiency

What is efficiency in business? It's how well a business can convert the required time, effort, materials, and capital in relation to its output. Output can be products, services, revenue, or however the business measures its parameters of success.

Instead of having valuable resources disappear into its systems, an efficient business can maximize its output with the smartest possible use of those resources. A simplified example of efficiency in business is when one business generates $5 million in revenue with the same amount of energy and labor costs as its similarly sized competitor, which only produces $3 million.

Efficiency vs. Effectiveness in Business

Efficiency is not the same as effectiveness and the two terms often cause confusion. A common way to think of effectiveness vs. efficiency is the difference between doing the right things vs. doing things right. It's possible to have an inefficient process with an effective result or an efficient process that is less effective.

For an example of the latter, consider two salespeople. Using scripts and time limits, salesperson A has developed a streamlined system that lets them make 100 calls each day. Salesperson B invests their time in developing a hyper-qualified list of prospects and then spends more time researching each contact. Salesperson B makes only 20 calls each day. However, 3% of salesperson A's calls result in a closed sale, while salesperson B enjoys a 25% closing rate. Salesperson B has developed stronger relationships with those customers, which is likely to lead them to a more positive overall experience and favorable impression of the business.

Efficiency and effectiveness are not mutually exclusive. In the salesperson example above, salesperson A has a system that is vastly more efficient at making phone calls. Salesperson B is effective at closing sales. Ideally, a business figures out how to accomplish both.

Types of Efficiency in Business

Business efficiency can be measured in many ways. Here are some different metrics that you can use to measure business outputs against the resources required to reach your goals. Doing so can help you make improvements in your systems and the use of your overall resources — time, money, labor, effort, materials, and capital.

Labor productivity: How much are your workers able to produce or accomplish during a measured period of time? Equipment, technology, automation, training, physical and mental health, and engagement can all influence an employee's overall productivity.

Eco-efficiency: Eco-efficiency is a measurement of the impact your business operations have on the environment. Ultimately, an eco-efficient business is excellent at reducing all forms of waste. This includes waste in materials, operations, and administration along with minimizing the environmental impacts of your product and packaging. These calculations can be tricky. For instance, calculating the cost of using post-consumer recycled plastics for packaging or materials, which increases eco-efficiency, may come with more upfront costs, but the practice may net you more customers because they seek businesses that prioritize a low environmental impact.

Energy efficiency: Reducing the amount of energy consumed to create products or services is an important sustainable practice that can increase your bottom line. Your energy footprint is the amount of energy needed to operate all aspects of a business — bathroom, office, and warehouse lights, equipment, and even shipping costs, when you recognize fuel consumption as a form of energy usage. You can evaluate business energy efficiency by calculating how much is used to run different areas of your business. Reducing these numbers can save you money. Business energy efficiency is a specific subset of eco-efficiency.

Operations efficiency: Operations are critical to a business model and efficiencies in these core processes can help reduce overall costs. Business operations efficiency can be found in a variety of strategies such as the appropriate use of technology, outsourcing, or bringing tasks in-house for more control.

Process efficiency: Processes are used in every area of a business — internal communications, HR, operations, shipping, and even how meetings are conducted are typically subject to specific procedures. See what is working and what isn't. Make changes when needed. Look for ways to make modifications that can also increase efficiencies in other areas. For instance, packaging products with less material can lower energy consumption and environmental impact, and allow you to fit more product in trucks, thus reducing shipping costs.

Return on investment (ROI): An investment is typically a current cost that is used for future gain. This gain can be any metric — an increased pool of qualified applicants, reduced waste footprint, and generated income are all examples. Measuring the ROI, e.g., lower energy bills due to a new rooftop solar array, is one way to assess efficiency.

Benefits of Efficiency in Business

No one enjoys wasting time or money and your business is no different. Aside from the general satisfaction that comes with running a thriving business, there are many benefits that come with getting the most out of your resources. Here are some of the benefits of efficiency:

• Efficiency may reduce costs. Whatever your metric for calculating efficiency, improving it will likely yield cost savings. Streamlining time-consuming HR tasks, improving worker productivity, and using less to do more all improve your bottom line.

• Efficiency can increase profits. The flip side of reducing costs is increasing profits. Figuring out how to get more products in the hands of your customers for less overhead costs or spending less on operations translate into a more profitable business.

• Efficiency can grow your business. Less time spent on mundane administrative tasks can free staff up to develop strategies for growth and expansion. Improving eco-efficiencies can give staff a sense of purpose and dedication, unleashing the engagement and creativity you need to move into new markets. Developing new ways of packaging or operating can even set your business apart as an industry leader. These are but a few ways that efficiency can grow your business into exciting new directions and create new opportunities.

• Efficiency can improve employee morale. Finding ways to run your operations more efficiently can save employees' time and energy. Done well, this can be seen as a form of respect. Actions such as reducing the number of mandatory meetings or giving staff convenient, on-demand access to their benefits accounts can strengthen their sense of loyalty to your business, thus improving engagement and reducing attrition.

Ways To Improve Business Efficiency

Efficient business practices are less about what you do and more about how you do it. Here are some big-picture ways to help maximize your resources and execute business functions more efficiently.

Use free resources. There are many valuable free resources for businesses that you can turn to when you need them. National organizations such as the U.S. Small Business Administration and SCORE provide advice and resources that offer guidance on startup issues, tax concerns, and in some cases even legal matters.

Invest in quality branding. Having a cohesive brand is invaluable in presenting a clear message to your customers, vendors, key stakeholders, and the public. All aspects of your branding — from your company logo to your website layout and product offerings — must be consistent with the message you want to send to your target audiences.

Think from your customers' perspectives. If you asked customers, "How can we improve our business?" How would they answer? Details about your business might seem obvious to you, and therefore unnecessary to mention in your sales and marketing materials. But if you approach this from your customers' point of view, you may think differently. Productivity improvements start by looking at your business from a potential customer's perspective. Ask for outside opinions to avoid making business decisions based solely on personal bias.

Outsource key business tasks. Business owners and employees often wear many hats, from leader and recruiter to designer and payroll administrator. Often, knowing how to improve business performance starts by recognizing that no one person can do everything on their own.

Consider outsourcing complex tasks that are integral to your business but aren't necessarily within your realm of expertise. Bookkeeping and accounting, for example, don't often fall within a typical business owner's area of expertise. Still, it's an essential part of business efficiency. A skilled outsourcing firm can balance your books much quicker and keep you up to date on financial data that helps you plan for the short- and long-term growth of the business.

Improving Efficiency on a Personal Level Can Help Improve Efficiency on a Business Level

It's not just your business that stands to benefit from greater efficiency. Every business owner and leader can improve productivity with "efficiency hacks" that can include:

• Setting the right goals. Big goals usually have too many moving parts to handle at any one given time. Envision goals you can reach in a manageable way.
• Completing one task at a time. Productivity can easily be wasted when you jump between tasks and try to figure out where you left off.
• Prioritizing. Create your daily task list in order of importance. Get important tasks done first before interruptions take your focus away. And avoid putting anything off. Do it right then and there, if you can.
• Managing your time well. What times of day are you most productive? Tackle difficult tasks during the time when you have the most focus and dedicate other times for less demanding tasks. Consider working in 50-minute blocks with short breaks in between.
• Reducing distractions. Email can be a huge time drain. Consider limiting your email activity by scheduling time every couple of hours to check it and stick to it. Similarly, schedule phone time to make or return calls, and place your phone on silent during your planned work blocks.

Knowing how to improve business efficiency helps everyone in the organization. As part of the process, learn more about how you can help your employees increase efficiency by more effective-goal setting to increase productivity and engagement.

How Do You Measure Efficiency in a Business?

Just as there are different types of efficiency in business, there are many ways to measure them. Some measurements are applicable across the board. Benchmarking your metrics is critical so you can evaluate your progress over time. Comparing your type of business efficiency with similar businesses or industries is another important way to assess whether your business is on target.

There are different strategies to measure business efficiency. For a company selling products, inventory turnover, or the lag time between moving inventory through the warehouse and to customers, can indicate if a product is moving and responding to customer demand. Efficiency ratios are used as an indicator of a business's overall short-term performance and can tell a business owner the lag time between turning inventory into cash. Measuring eco-efficiency can get trickier and involves measuring net sales and quantity of goods produced and sold against energy, materials, and water consumption, along with greenhouse gas and ozone-depleting emissions. The World Business Council for Sustainable Development issued a guide to help businesses measure eco-efficiency and company performance.

The Role of Analytics in Improving Business Strategy

HR is another business operation where efficiency is imperative. Specifically, the process of employee recruitment and retention is simply too important to leave to chance.

HR analytics can provide human resources departments with better data collection, reporting, and the information needed to make data-driven business decisions. Whether a business unit manager needs the latest information on time and attendance to streamline their scheduling process, or a quick payroll audit by the HR manager to address a problem, analytics help makes data accessible to business leaders.

Here are some ways to leverage HR analytics and improve the way you run your business and increase efficiency:

• Recruiting. When a job candidate is brought on board but ends up not being right for the position, turnover can happen, and filling open positions becomes expensive and time-consuming. Recruiting analytics lets you see where your best candidates come from and which profiles tend to succeed more often over the long term. In addition, analytics can help clarify how your recruiting process is working and where there might be room for improvement. For example, if analytics show delays in candidate communication or long review times at the hiring manager level, this can provide actionable insights for making process improvements.
• Time and attendance analytics. With time and attendance analytics, companies can determine the most efficient patterns in employee scheduling to strategically manage the scheduling process, stay in compliance with company and legal requirements, and even identify patterns of absenteeism that could signal trouble at the individual or department level.
• Benefits and other services. HR data analytics can streamline the management of benefits and other services within human resources. Consider the reporting needed during open enrollment. An analytics-driven reporting system makes it easy to see who is enrolled and where decisions are pending. Analytics can also help HR managers understand which benefits are being used and which ones are being overlooked.

Common Payroll Mistakes That Can Lead to Errors and Business Inefficiencies

Payroll processing is a particular company operation where accuracy and efficiency matter. As just one example, businesses must submit taxes to federal, state, and local authorities, at specified times and in designated forms. Such demands require time-consuming administrative efforts which, if mishandled, can lead to costly penalties. Some of the most common payroll errors include:

• Filing late with the IRS. The IRS stipulates specific due dates for depositing taxes and filing returns. Late deposits and late filing of payroll tax returns can result in penalties and interest charges.
• Errors on tax forms. Errors made on tax forms may make it appear that you have remitted too much or too little in payroll taxes. Such mistakes can also impact reconciliation with other tax forms, such as W-2s.
• Misclassifying employees. You must take the appropriate steps to correctly classify each worker as an employee or an independent contractor. Misclassifying an employee as an independent contractor can result in retroactive payroll tax liabilities as well as fines and penalties.
• Processing payroll late or not at all. Late or inaccurate payroll processing not only creates unhappy workers, but it may result in fines and penalties depending on the jurisdiction, as well as, issues like missed premiums or late retirement plan contributions, which can take additional resources to rectify.
• Paying the wrong amount. Incorrect data entered into a payroll database can result in problems connected to paying employees at the right rate of pay and for all hours worked. Corrections can be time-consuming and can wreak havoc on your bottom line.
• Not maintaining adequate payroll records. State and federal regulations mandate businesses keep specific employee records. Some local and state jurisdictions may vary in their recordkeeping requirements, so employers must be familiar with such requirements in the location(s) in which they do business.

Outsourcing Payroll Leads to Productivity Improvements

Outsourcing payroll processing is a solution to both enhancing efficiency and helping to reduce your risk of the payroll processing mistakes described above. Among the key benefits:

More Time for Business Priorities

If you have a workforce, regardless of your business or industry, attending to payroll-related matters likely consumes a great amount of valuable resources. One pay period follows another (without interruption) creating a ceaseless demand for time and energy to ensure that employee data is input correctly — and then reviewed for accuracy.

The complexities of payroll processing require a significant amount of time committed on a daily and weekly basis. Although business owners are ultimately responsible for meeting payroll accuracy and filing requirements, having a provider on hand often saves a great deal of time and helps them feel more confident about staying up-to-date on legislation and regulations.

Integrity of Confidential Employee and Company Data

Data theft and breaches are all too common today, and payroll processing represents a potentially risky area for your company. Threats include identity theft, employees tampering with company records, or even embezzlement. The use of in-house payroll processing software is not risk-free, either.

By contrast, a trusted outsourcing vendor has information security controls designed to safeguard sensitive data. Together with redundant backup and multiple server locations, a quality provider invests in state-of-the-art systems for storing and protecting data, simply because it's part of the service provided to clients.

Stay Current With Tax and Employment Laws and Regulations

Every business with employees must comply with federal, state, and local tax and employment laws and regulations or face stiff financial (and possibly legal) penalties. Not only can these penalties cost you money, but they demand time and attention to avoid — time that takes you away from your business. A vendor that specializes in payroll processing has the knowledge to help you with compliance responsibilities.

Outsourcing HR Functions Boosts Efficiency

Outsourcing HR functions can result in a significant improvement in business efficiency. A skilled outsourcing company helps mitigate the risk of noncompliance with current reporting and filing requirements, as well as assisting with the development of worksite safety programs, and insurance benefits.

More small businesses are investigating the merits of entering an arrangement with a professional employer organization (PEO), which enables business owners to outsource the management of employee benefits and related areas, including these key tasks:

• Creating an employee handbook
• Building job descriptions
• Assisting with monitoring regulatory and legal compliance developments
• Maintaining Affordable Care Act documentation
• Providing comprehensive online HR resources
• Offering onsite employee training
• Helping with risk assessment

Outsourcing other key processes — such as marketing, website maintenance, and social media activity — are worth looking into as well. The more you can outsource to a reliable service or company, the more time you gain to concentrate on what will contribute to the growth of your business.

A More Efficient Business Can Help You Succeed

Employers who look to maximize their resources and execute business functions more efficiently can position themselves to enjoy the advantages that come from doing so. Those who don't are gambling with a future that can render their business obsolete.

Learn more how Paychex HR services can help you avoid costly and frustrating mistakes that waste energy, effort, and money. Instead, you can reap the rewards that come with improved business efficiency in key areas of your organization.

Emerging small-business trends represent the challenges and opportunities that exist for employers in 2023. Over the past few years, businesses and their employees have faced enormous hurdles, undergone an incredible amount of change in the ways work is done, and have had to practice adaptability and flexibility. There's no reason to believe this will change anytime soon. Here are some notable trends in business that could have significant impacts on the way your business works and interacts with customers this year.

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Small Business Trends in 2023

The emerging trends outlined below represent several shifts in the business world that are important to keep an eye on and embrace in a way that makes sense for your organization.

Inflation and Supply Chain Issues

We were inundated in 2022 with headlines about U.S. inflation rates, domestic and global supply chain issues, and other hurdles that threw a wrench in many businesses' plans for growth. The reality is we don't know exactly what will happen in 2023: currently, prices have increased about 8 percent, the highest they have been in nearly four decades, and lingering impacts of both the pandemic and global issues such as the war in Ukraine continue to stall supply chains for many industries.

Businesses should focus on controlling what they can. This may mean using local or regional suppliers to circumnavigate supply chain slowdowns, or putting a system in place to manage cash flow. And don't forget how these challenges, particularly the rate of inflation, impact your employees. The cost of living in the U.S. has skyrocketed, affecting both employees' salaries and employers' budgets as they try to remain competitive and keep great workers in today's labor market. So while employees may be voicing concerns about pay raises, employers need to weigh factors such as competition in the labor market, budgets, and business projections to determine whether pay increases make sense this year.

The Expectation of Seamless Customer Experiences

The pandemic accelerated a shift from brick-and-mortar stores to digital shopping. From groceries to clothing and other consumer goods, shopping entirely online with the option of home delivery or curbside pickup continues to offer customers convenience, efficiency, and even a sense of personal safety.

Although digital experiences have now become common, consumers' shopping habits are shifting yet again. Whether driven by increased awareness to reduce monetary and carbon costs associated with shipping, lending support for their local economy, or simply wanting the experience of shopping in-person again, consumers are embracing a hybrid or omni-channel approach to shopping, with the expectation that there will be a seamless experience as they go from online to in-person with the same brand. They will interchange visits to brick-and-mortar stores, use mobile apps, and shop online to make choices that support their needs and beliefs.

To ensure success, small-business owners should make sure they have a mobile-friendly, easy-to-navigate website with e-commerce options that allow consumers to quickly find what they want and purchase products or services from their mobile devices. The same attention to detail should be applied to "traditional" shopping methods. Look for ways to continue the convenience of blending the two such as curbside pickups, and make sure your in-store customer service leaves customers with a positive experience.

The Rise of Voice-Assisted Technology

As part of the digital transformation that continues to effect change in business, employers are increasingly exploring new ways to use voice technology, both externally to appeal to tech-savvy customers and internally to improve their own business processes. As we mentioned above, customers have come to expect a seamless experience between online and in-person interactions with a business. Companies that embrace voice technology — whether it's leveraging virtual assistants and chatbots to provide service 24/7 or optimizing a website for voice search — stand to gain a competitive edge in 2023 and beyond.

Voice-assisted technology that improves business processes is another part of this emerging trend, particularly since it can expedite critical tasks for small business owners. Take voice-enabled technology for running payroll, where administrators can receive real-time payroll data insights, review and approve rate changes, add new employees, and submit checks for payday — all secure and completely hands-free.

Increased Focus on Sustainability

Growing concerns around how habits, purchasing decisions, and lifestyles impact the environment have cemented the issue of sustainability firmly in many customers' decisions — from which companies they do business with to the types of goods and services they choose to buy or not.

To not only effectively embrace this trend but also respond meaningfully, employers need to take responsibility for implementing meaningful change in their practices to reduce the environmental impact of their business model. Look for opportunities to reduce the energy consumption and greenhouse gas output of your supply chain, assess your internal practices to reduce waste, embrace remote or hybrid workplaces for employees, and evaluate your own business' long-term environmental impacts in the form of packaging and product lines. Ultimately, these are measures that can help your business gain a hiring advantage and increase its own resiliency through being more efficient and responsive to environmental pressures.

Alternative Payment Options

As payment processing evolves and more options become available for safer non-cash transactions, consumers are using mobile, card, and alternative payments more often. The onset of new technology, combined with the rising demand for contactless payments, has further hastened the shift away from cash transactions. Small-business owners should continue to expect increased demand for alternate payment options in the form of applications, mobile wallets, and wearable devices. If they haven't already done so, it's critical that small businesses research contactless payment options. Fortunately, this trend reaps benefits such as a business' ability to leverage the systems to increase sales, improve cash flow, and reduce the risk of accepting fraudulent currency.

Continued Focus on Talent Management

The past year presented businesses nationwide with unprecedented challenges around hiring, and overall talent management. Historically low unemployment levels, the Great Resignation, layoffs in the technology sector, and quiet quitting were just a few examples. To address ongoing talent management challenges, small businesses need to have a firm understanding of what future and current employees want from their employers, what motivates them, and what it will take to keep them for the long term. This might mean offering long-term remote work options or hybrid work spaces, embracing new technology and software solutions, evaluating incentives and benefits that you offer, or putting a renewed focus on employee development and promoting from within.

HR Compliance

While certainly not new, a focus on HR compliance should always be top of mind for businesses of all sizes. The number of employment laws and regulations are on the rise, and the risk of penalties for non-compliance has perhaps never been greater. For example, we may see an uptick in business audits, as the Inflation Reduction Act passed in summer 2022 included additional funding for the Internal Revenue Service (IRS). Overall, there should be a clear strategy for bridging the gap between the company's growth trajectory, objectives, and compliance practices that influence activities such as hiring, employee development, and retention. If you haven't done so in the past, this year may be a perfect time to develop an HR compliance checklist that serves as a compass for compliance-related areas.

Which Industries Are Projected to Boom in 2023?

Despite a currently strong labor market, an economic downturn could lie ahead. We may also continue seeing employees leaving their jobs to launch their own entrepreneurial pursuits. Still, some industries are projected to boom in the upcoming years, as forecasted by the U.S. Bureau of Labor Statistics:

• Healthcare and medical research: The COVID-19 pandemic caused a higher public demand for medical and scientific research and development related to infectious diseases. Finding ways to mitigate viral spread and developing treatments and vaccines have been fast-growing areas of interest in the wake of the pandemic.
• Computer and IT services and security: With many workforces embracing remote work for the long-term, there continues to be a strong demand for computer and IT services, support, and security.
• Leisure and hospitality: Since so many businesses in leisure and hospitality were hit hard during the pandemic, it's anticipated that there will be considerable growth in this sector as it rebounds to pre-pandemic levels, and people look to resume traveling and spending more time outside the home with loved ones.
• Professional and business services: The BLS projects that about 1.5 million jobs will be added in this industry within the next decade, an increase that includes growth in computer systems design and related services, as well as management, scientific, and technical consulting services.

Use Emerging Trends in Business To Drive Your Success

Considering these and other small-business industry trends, along with your many responsibilities as a business owner, you may want to find support to help you meet your goals in 2023. You may be able to outsource many of the duties that require valuable time and resources, such as HR administration, payroll, and assistance with regulatory compliance.

It's an annual chore: filing income tax returns for your business. This includes filing federal income tax returns, as well as state and local returns, for businesses and for owners. There is no way to avoid this chore. The best way to handle this responsibility is to be prepared and get started as soon as possible.

When Are Business Taxes Due in 2023?

Pay attention to the filing deadline for 2023 income tax returns. If you miss the deadline, you may incur late-filing penalties—and these penalties are not tax-deductible. The following are federal income tax return deadlines for 2022 returns:

• For entities: Partnerships and S corporations reporting on a calendar year basis, which most do, must file their 2022 income tax returns by March 15, 2023. Calendar-year C corporations must file their 2022 income tax return by April 18, 2023 Limited liability companies (LLCs) with multiple members file partnership returns unless they have elected to be taxed as corporations; one-member LLCs file their return with the owner's personal tax return. Sole proprietorships also file their business return with the owner's personal tax return.
• For owners: Business owners must file their personal 2022 income tax returns by April 18, 2023.

Check your state for its filing requirements. Many states have the same filing deadlines as the ones for federal income tax purposes. If you do business in more than one state, you may have to file multiple state income tax returns. Pay special attention to filing requirements for businesses doing online transactions. Some states consider this a sufficient connection ("nexus") to them such that state tax returns are required there.

The federal filing deadline may be extended if you are located in an area that's been declared a federal disaster area. There is an automatic 60-day filing extension for disaster victims, but the IRS may grant even more time to file. For example, victims of Hurricane Ian that began in Florida on September 23, 2022, and who had obtained a filing extension (explained below) for their 2021 income tax returns to October 17, 2022, were given until February 15, 2023, to file those returns. The IRS provides more information about filing extensions for disaster victims.

File an Extension for Business Taxes

If, for any reason, you cannot meet the applicable filing deadline, you can obtain an automatic six-month filing extension just by asking for it; no explanation is needed. You must submit the request no later than the filing deadline. Entities use IRS Form 7004 to request a filing extension. Individuals (including sole proprietors, self-employed individuals, and one-member LLCs) use IRS Form 4868.

Getting more time to file the return does not give you more time to pay taxes due. It's advisable to pay as much as you expect to owe to minimize or avoid late-payment penalties. These penalties start to run from the filing deadline without regard to extensions.

How To File Taxes for a Business

Most business tax returns are e-filed. According to the 2021 IRS Data Book, 91% of S corporation returns were e-filed during the government's 2021 fiscal year ending September 30, 2021. There are two very good reasons for this:

1. E-filing is the quickest way to have a return processed, especially given IRS personnel problems and a backlog of processing paper returns.
2. Tax return preparers who file more than 10 returns in the 2023 filing season must e-file, with very limited exceptions.

Choose Your Tax Preparation Method

Decide as soon as possible who is going to prepare and file the return(s). Will you use a CPA or other tax professional? Will the business returns be handled in-house by a company employee? Are you planning to prepare your business and personal returns using tax preparation software?

If you want to use a CPA or other tax professional, as most businesses do, and haven't been working with one, explore your options. Make sure you vet them before making a selection. The IRS has tips on choosing the right tax return preparer for your situation.

If you work with a tax professional, schedule an appointment as soon as possible to discuss your situation.

Gather Your Tax Records

Tax return information is based on the records you have on income and expenses for the year. Typically, this information is in your desktop or cloud-based accounting system and can easily be accessed by a tax professional or other return preparer to complete the return. For example, payroll information about what the business paid in wages and compensation as well as employment taxes — all of which factor into the income tax return — should be easily found in your accounting system.

In addition to annual income and expenses tracked in the accounting system, be sure to have various records and other information on hand to help with return preparation:

• Prior year returns. These show potential carryovers that can be used on current returns to reduce tax liability. They include, for example, net operating losses, general business credit, and capital losses.
• Information about owners' investments. Because partnerships and S corporations pass through income and losses to owners, it's essential that owners know their "basis" in their company. If losses are passed through, they are deductible on an owner's return only to the extent of such basis. For example, an S corporation owner's basis is the amount invested in stock or loans made by the owner to the corporation. Basis information must be included on the tax return using Form 7203 and, where losses are claimed, on Schedule E of Form 1040 or 1040-SR. Partnerships must report on Schedule K-1 of Form 1065 a partner's beginning and ending capital account. The capital account is the amount of capital contributed to the partnership during the year, the partner's share of the partnership's current year net income or loss as computed for tax purposes, any withdrawals and distributions made to the partner by the partnership, and any other increases or decreases to the capital account.
• Asset information. If the business sold assets, it's necessary to have information about their basis to figure gain or loss. For example, if the business sold a building, basis used to determine gain or loss takes into account what the business paid for the building, depreciation claimed for it, and other adjustments.

Supplemental Tax Information

Business deductions and credits cannot be created out of thin air and must be substantiated by receipts, invoices, canceled checks, and other documentation. This supplemental tax information is not submitted with the return, but should be retained and easily accessible in case of an audit.

In addition to receipts or other paperwork that prove expense amounts, tax law requires additional documentation in some situations. Examples of required documentation include:

• Special recordkeeping for travel, meals, vehicle, and business gifts. Receipts alone are not sufficient to back up deductions claimed for these expenses. Required records are explained in IRS Publication 463.
• Substantiation for charitable giving. If the business made donations of $250 or more, a written acknowledgment from the organization is required. This and other substantiation rules for charitable donations are in IRS Publication 526.

Consider the Impact of Out-of-State Workers

For federal income tax purposes, the fact that many businesses use remote workers is not important. But for state and local income tax purposes, this situation may create tax filing problems. Businesses normally file their state income tax returns according to "nexus," meaning where they have a business connection. Typically, this is where the company is physically located ("physical presence"). However, having workers in another state may create the nexus sufficient to require filing an income tax return and paying state and local taxes in that location.

Check the income tax rules for all states in which you have employees working remotely (you should know who they are through your payroll system) to determine if you have income tax obligations there.

Consider Post-Year-End Tax Saving Strategies

The calendar shows that last year has ended, but the opportunities for obtaining additional tax deductions are still available. These involve taking certain actions and making certain elections on tax returns. Here are some examples:

• Maximize retirement plan contributions. The deadline for making tax-deductible contributions to a qualified retirement plan is the extended due date of the return. Don't have a qualified retirement plan for the business? One can be set up and funded through the extended due date. More information about setting up and contributing to a qualified retirement plan, as well as tax credits for doing so, may be found in IRS Publication 560.
• Decide how to write off the cost of equipment. If the business bought equipment, machinery, or certain other property in 2022, there are a number of ways to deduct the cost. These include first-year expensing (Section 179 deduction), bonus depreciation, regular depreciation, and a de minimis safe harbor election. The decision on which method to use is made when the return is filed. The choice can affect taxes this year and in years to come. More information about these options is in IRS Publication 946.
• Check for research credit refunds. If your company engaged in research activities in 2022, you may not be able to use the full tax credit figured on research expenditures. The credit, which is part of the general business credit, is subject to a one-year carryback. If you're making a claim for a refund based on the research credit, be sure to include all information that's now required.

Business Tax Changes to Be Mindful of When Filing in 2023

Whether you're an experienced business owner or just getting started, tax credits and deductions are continually changing. Here are some new developments that you should be aware of to ensure your taxes are correctly filed and you're not missing anything come the tax deadline in 2023.

As a reminder before taking any action, speak to your CPA, tax professional, and/or legal adviser to determine the best course of action for your business.

Some Old Rules and Some New Rules

Some tax rules had been temporarily put in place to provide relief during the pandemic. These rules expired, letting previous rules come back into place for 2022 returns. What's more, some rules that had been set to expire at the end of 2021 have been extended or modified for 2022. The changes to note on the 2022 return include:

• Charitable contribution limits. The 25% taxable income limit for donations by C corporations that applied in 2021 is back to the standard 10% limit in 2022. For owners of pass-through entities, the limit on their share of cash contributions made by their businesses that was up to 100% of adjusted gross income in 2021 reverts to the 60% limit. What's more, there's no option for deducting cash contributions in 2022 by individuals who don't itemize deductions.
• Alternative energy improvements. The percentage of the cost of solar panels and other alternative energy improvements, which was supposed to decline to 26% in 2022, has been fixed at 30%.
• Amortization of R&D expenses. Before 2022, these expenses could be deducted in full in the year they were paid. Beginning in 2022, they must be amortized (deducted ratably) over no less than five years (15 years for foreign R&D).
• Tax credit for buying clean vehicles. The tax credit limit for purchasing an electric vehicle in 2022 is the same as it's been: $7,500. However, for purchases on or after August 16, 2022, there's a final assembly requirement that must be made in order to claim the credit.
• Paycheck Protection Program loan forgiveness. The amount of the loan forgiven is viewed as tax-exempt income; it doesn't increase reportable income. But it's taken into account in figuring gross receipts for purposes of determining eligibility by some businesses to use the cash method of accounting. It's factored into a partner's basis.

Adjustments for Inflation

Each year, the IRS adjusts dozens of tax items to account for inflation. For example, tax brackets have been adjusted for individuals, impacting what owners of pass-through entities pay on their share of business income. Some other items impacting businesses due to cost-of-living adjustments (COLAs) include:

• Standard mileage rate for business driving. If actual expenses aren't deducted, then the IRS-set rate is 58.5¢ per mile for the first half of 2022 and 62.5¢ per mile for the second half of 2022.
• Small employer's health insurance credit. Eligibility for this credit is based in part on wages; the amount has been adjusted for inflation for 2022.
• Gross receipts test. This test is used to determine whether a business can use the cash method of accounting, forego doing inventory accounting, and for certain other purposes. The gross receipts test in 2022 is $27 million in average annual gross receipts in the three prior years.
• Sec. 179 deduction (first-year expensing). Instead of depreciating the cost of machinery, equipment, and other eligible property placed in service before the end of 2021, an immediate deduction up to the 2022 limit ($1,080,000, reduced dollar for dollar for purchases in excess of $2,700,000).
• Limitation on losses for noncorporate taxpayers. The limitation that caps losses for the current year has increased; excess losses become part of a net operating loss that can be used in future years.
• Qualified business income (QBI) deduction. The taxable income threshold above which the QBI deduction may be limited or barred has increased for 2022.

Other Reminders

When filing the 2022 income tax return, keep in mind some other tax rules. These include:

• E-filing. Some businesses must e-file their returns; others should consider doing so. The IRS backlog on unprocessed paper returns demonstrates the need to file the return electronically. This is especially true for those expected a tax refund.
• Estimated taxes for 2023. The first installment of estimated taxes for individuals and calendar-year corporations is due on the same day as 2022 income tax returns are filed. Obtaining a filing extension for filing the 2020 return does not give you more time for paying estimated taxes for 2023. Check with your tax professional about new tax rules that may affect 2023 taxes.

Begin Filing Taxes for Your Business, and Stay Current on Tax Laws

By starting sooner and doing some prep work, you can make filing taxes for your business a more efficient and less stressful process. With changes in the law and new IRS guidance, you'll want to consult with your accountant to ensure you understand what is required to stay compliant, as well as learn about additional opportunities for tax savings available to you through credits. Paychex offers tax services that can help your business navigate the complexities of filing taxes.