How to Get Ready for Tax Time
Businesses may face yearly tax deadlines in addition to April 15. Use our guide to help your small business prepare for tax time.
As tax season begins, there’s a lot to think about. What business deductions should you take? What taxes do small businesses have to pay? To help you prepare and get ready, we will cover the following topics:
- What Taxes a Small Business Pays
- Small Business Tax Deductions
- Top 10 IRS Audit Triggers and What to Do if Audited
- How to File Taxes and What to Do if Need Extension
- Top 5 Tax Mistakes Small Businesses Make
While paying taxes is arguably one of the least enjoyable aspects of running a business, our series is designed to make tax time much easier and a little less painful. To help you start preparing for tax time, here are some helpful ideas.
Plan Your Tax Year Based on Your Business Structure
Here’s the thing: there’s not actually one single “tax time.” April 15 is the date that looms large for individual returns, but businesses may also face other deadlines throughout the year, especially if they pay quarterly taxes or issue 1099s to contractors. It’s important to keep track of the dates so you have the proper paperwork prepared and the money available to pay anything you might owe.
In the current calendar year, you will pay taxes on income you made in the previous year. The date on which your payments are due will depend on your company’s legal structure.
- For most S-Corps and Partnerships, taxes are due March 15.
- For most C-Corporations and LLCs, the due date is April 15, the same due date as individual income taxes.
Throughout each year, there are other important dates and tax deadlines to note. If you have employees, you’ll need to provide them with the wage documentation they need to file their own returns. The deadline for providing these documents is often in January, but can vary. You’ll also need to pay payroll taxes on a regular basis. If you are self-employed, you may need to pay a self-employment tax and quarterly taxes on your estimated earnings for the year. State deadlines may be different than federal deadlines.
Your accountant can help you get set up for all the appropriate dates for the year, and the IRS has an online calendar noting all of the federal tax deadlines.
What Records Should You Keep?
There are many reasons to keep good records of your business’ financial transactions. Accurately entering the information will help you prepare the financial statements you need to run the company properly and prepare your tax returns at tax time.
The financial records you keep have to support the income, expenses, and credits you report and be available for the IRS to inspect. If you get audited, you may be asked to explain or prove the claims you’ve made. The responsibility will be on you to be able to prove any entries, statements, or deductions on your tax return.
The IRS has a list of the documentation it recommends you hold on to in order to back up your figures. Generally, it includes all the documents that support your income, purchases, expenses, and assets. Think along the lines of bank records, credit card receipts, canceled checks, register tapes, invoices, petty cash slips, and business travel and entertainment receipts. Also, hold on to your previously filed tax returns.
Information can be kept as hard copies or in digital form, as long as IRS standards are met. If you are scanning and storing records on your computer, be sure to keep a cloud or other backup. NeatFiles has software that scans receipts and exports the information into most accounting software programs.
How Long Should You Keep the Records?
For tax purposes, the IRS says you should keep tax documentation until the period of limitations for that return runs out. The IRS lists the specifics on its website, but generally, if you have filed a return that contains all of the income you’re required to report, keeping records for three years is sufficient.
There are exceptions, however, so check the IRS site and speak with your accountant. In some cases, the IRS can audit you up to six years after you file, so you may want to err on the side of caution and keep receipts and other paperwork for that long. Records of employment taxes should be kept for at least four years.
Also keep in mind that there are reasons not related to taxes to hold onto records, such as for insurance or creditors. The IRS guidelines aren’t the only ones you might want to follow.
How to Get Organized
If you are following our small business bookkeeping tips, you’re already a long way toward being well organized for filing your taxes, especially if you’re using accounting software. It’s easy to integrate that software with all the major tax applications like TurboTax or TaxACT, whether your accountant does it for you at tax time or you do it yourself.
With an accountant or on your own, here’s how to make sure you’re as ready as can be:
Stay on top of your business transactions
Make good record-keeping a habit. Some business owners enter their sales and expenses daily, others do it weekly, and some wait for one, big monthly reconciliation. Frankly, the more often you can do it, the better. Everything will be fresher in your mind and the paperwork will be less daunting when it doesn’t pile up. Whatever you do, don’t wait till tax time to reconcile your books for the entire year. That’s a headache waiting to happen.
Collect all of your receipts and statements
Keep all your receipts, even if you just write a note or two on the back and put them in an envelope for the month. This is especially important for documenting business travel or entertainment expenditures. Note who you were with and what the business purpose was. Consider an expense-tracking app for your phone, which can store images of receipts and notes together.
Make sure you have documentation for every purchase you’re claiming a deduction for, including medical expenses, interest, and charitable contributions. If you cover certain expenses for your employees, like supplies and union dues, those are deductible, as well. Keep an accurate log, including the date you paid for something, why, and a receipt for the purchase.
If you have a home office used for business, you may qualify for the home office deduction. Keep records of how much you spend on things like homeowners’ insurance, mortgage, utilities, and maintenance. Similarly, if you use your personal vehicle for business (other than commuting), keep records of the miles you drive for work, repairs, fuel, oil changes, etc.
You’ll need statements concerning any investments you have, such as stocks, bonds, mutual funds, real estate and interest.
If you or your spouse has income from another employer, you’ll also need W-2 or 1099 forms for that. The originals are filed with the IRS and matched to your tax return, so be sure to get and include them with your income filing at tax time.
Recognize and deal with any difficulties
If you don’t have the proper information or documentation to prepare your return correctly at tax time, don’t put off handling the situation. Extensions are available, and you or your accountant will save a lot of stress if you file for one early rather than waiting until the last minute.