Top 10 Tax Preparation Tips for Small Business Owners

Running your own business certainly has many perks. You can have more control over your work schedule, hire people around you, and experience the excitement of building a company from the ground up. But, being a small business owner also comes with responsibilities that are a little less enjoyable—like paying taxes.
 
Few business owners find tax preparation to be fun, but all must bite the bullet and get through it each year. However, it doesn’t have to be the headache you might be envisioning from years past. When you follow these tips, your taxes will be more organized and streamlined.

1. Separate Business and Personal Expenses

Small business owners—sole proprietors, in particular, due to the minimal paperwork required to start this type of business—often struggle to separate work and life. After all, your work is your life, right?
 
It’s extremely important that you avoid this pitfall—at least financially—from day one. Mixing business and personal expenses not only muddies your accounting, but also presents the risk of the IRS disallowing certain business expenses if you appear to be operating as an individual. The easy way to draw the line is to use separate bank accounts for the business. For many, the harder part is maintaining that divide.
 
 

2. Know the Dates

The IRS provides a tax calendar for businesses and the self-employed. Use this tool to stay on top of to-dos such as filing W2s and W9s, making estimated payments and, of course, filing your return. Your tax dates can differ based on the details of your business; it’s best to map out the entire fiscal year in advance to be sure you don’t miss any important action items.
 
 

3. Make Estimated Payments

The IRS requires businesses expected to owe at least $1,000 for the tax year to pay quarterly estimated taxes. Most businesses naturally fall within this parameter, including sole proprietors who are paid as 1099 contractors. While paying estimated taxes can appear to have a negative impact on cash flow in the short term, you are essentially minimizing your liability on your return in the long run. If you don’t make estimated payments and your business does reasonably well, you could be subject to a large tax bill in April, along with fines from the IRS.
 
 

4. Invest in Proper Software

Excel is an accessible and passable starter tool for first-time business owners, but once your business is up and running, it’s time to set the foundation for sound financial reporting. There are many robust accounting programs that are just as easy to use as Excel once you get the hang of them. Accounting software can also consolidate your business finances, including invoicing, payroll and expenses.
 

5. Track Expenses Closely

Speaking of expenses, the more of them you can capture, the more you will be able to reduce your adjusted gross income (AGI) and thus your tax liability. That entails keeping close tabs on the expenses that are applicable to your business, which might include office supplies, meals and entertainment, travel, transportation, insurance, advertising, legal fees and other deductions. If you’re scrambling to gather these right before the filing deadline, you will likely miss some. Try to log your expenses at least monthly, if not weekly or as they occur.
 

6. Digitize Receipts

Some expense tracking tools make it easier than ever to scan and save receipts. If you can work this into your routine, take advantage of the technology we have at our fingertips today. Digitizing your receipts can reduce clutter by allowing you to throw away paper receipts. More importantly, a safe and organized online file of your expenses can be a lifesaver in the event you are audited by the IRS.
 

7. Deduct Your Home Office

The home office is one of the most misunderstood deductions. Some business owners simply overlook it, while others overdo it.
 
This deduction used to be somewhat complex, requiring you to calculate the workspace and the amount of time spent in it versus the living space as a whole. However, the IRS has since boiled the guideline down to a prescribed rate ($5 per square foot in 2018) to be multiplied by the square footage of the workspace and arrive at a dollar figure for the deduction. For example, if your home office is 100 square feet, your calculation would be: 100 (square feet) x $5 (IRS prescribed rate) = $500 deduction. Just remember that your home office must be used exclusively for work, almost to the point where it is cordoned from the living space.
 
 

8. Look at Last Year’s Return

Your previous year’s tax return is a compare, contrast, reference and roadmap resource all in one. It provides the framework for what your next year’s return will look like, and also helps you measure your business finances year over year. Everyone will tell you to save your previous business tax returns; we’re telling you to not only save them, but also keep them handy!
 
 

9. Hire a Professional Accountant

Very few small business owners specialize in tax preparation, and even those who do should not be devoting their time to taxes. An experienced and reliable accountant is one of the cornerstone team members of a successful company. Seeing as you don’t necessarily need to have your accountant on staff full time and can instead pay them solely for their services, there is no reason not to seek an expert to prepare your taxes and educate you on how best to align your business finances.
 
 

10. Make Tax Planning an Ongoing Activity

After the April whirlwind, it’s tempting to remove yourself from tax discussions. Before you know it, another year has passed and you’re back in the same position. Tax planning for business is not a once-a-year rush job; it’s an integral part of making important decisions and establishing a financially viable company. All of the tips above are designed to help you bring tax planning into your business strategy and minimize your stress come tax season—a result every business owner can appreciate.
 
About the author:
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovate ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over 19 years experience in the industry. Credit.org is a nonprofit financial counseling agency specializing in Debt Management Plans and helping people get out of debt.