The 2019 tax season marked a notoriously challenging period for small businesses, who faced myriad changes to the tax regulations, leading to frustration across the board. If your company is on deck to file business taxes this coming April, now is the time to prepare so you can face smooth sailing in the new year.
Consider the following three tips that will help you be completely ready at tax time.
1. Create That Tax File and Begin Populating It
This first step may seem rudimentary, but many companies let the fourth quarter of the year pass without having created a file for their tax documents. This can be a physical file folder (or series of folders), or it can be an electronic storage area where you can file emails, online receipts, payroll data and other documents. Start to determine exactly which documents you’ll need at tax time, which can vary based on your business type.
For instance, if you pay contractors, you’ll need to create 1099 forms for them, so be sure to have a record of what you’ve paid each of them and place those records in your file. You’ll also need completed W9 forms on file from these subcontractors, which you should have received before issuing their first checks. If you’ve paid estimated taxes, ensure that you have documentation of that.
“If a business bought any new assets like equipment or computers, we’d need a detail of those purchases,” says Kim Walker, CPA, an accountant in Las Vegas, Nev. “If they leased any new assets like a copy machine or even a car, we’d need to review the lease agreement that they signed.”
In addition, businesses that have bank loans would need the lending information, including what they paid in interest and the balance of the loan. “If they plan to claim a vehicle or auto expense, we need their business mileage and we have to pro-rate the expense between personal and business use,” Walker says. “To do that we need the business mileage as a ratio to the total mileage driven for the vehicle. There are apps that can help you track it, but it’s one of the first things that the IRS will review and audit, so those records are important to have on-hand.”
You should have a way to categorize your expenses in your tax file, and if you’ve classified almost everything as “Other,” “Misc.” or “Overhead,” then go back through those expenses and see if some can be recategorized. “A large undescribed category could trigger a look by the IRS and I prefer not to do that, so the more we can detail out the expenses into specific categories, the better off we are,” Walker notes.
You’ll also want to maintain both your receipts and proof of payment for items you’ve purchased. Some business owners think a credit card statement is equal to a receipt for an audit, but it isn’t — the IRS requires you to show what you purchased (by showing a receipt) and also verification that you paid for it (which would be a cancelled check, a bank statement showing a debit withdrawal or a credit card charge), Walker adds.
2. Prepare to Put Together Important Business Calculations
When it comes time to file your taxes, you’ll need to have asset records, a profit and loss or income statement for the year, balance sheets showing how much your business is worth, and other documentation that requires you to make detailed calculations. Although you probably can’t tally everything up until January, you can certainly have those documents ready and in place so you simply have to enter data to finalize them.
“Generally, I like to see a December bank statement, because even if a company has a balance sheet, I want to see if it’s in the ballpark of what’s on the balance sheet,” Walker advises. “If the balance sheet showed a balance of $200,000 and the bank statement shows a balance of $10,000, that would be something I would want to know, so I could investigate why is there such a difference.”
3. Pinpoint Tax Filing Details
You should be aware of your filing requirements and tax due dates long before the new year rolls around – as well as where you’ll be filing your taxes. It’s possible that you incorporated your business in one state even though you’re physically located in another. Or perhaps you make money in a variety of states and you aren’t sure what the tax filing requirements are in terms of your state returns. Now is the time to sort that out so you can be ready.
“Every state has its own particular laws about when they want you to file and what you need to report,” Walker says. That information is usually on the state’s website, so you should be able to find it easily. “If you operate in five different states, check those five websites to see what the thresholds are and what the compliance laws are,” Walker notes.
View the full article at: http://blog.escalon.services/3-tips-help-you-prep-now-for-the-upcoming-tax-season