If you’re a finance pro at a startup or small to midsized business, chances are this isn’t your favorite time of year. Tax season crunch time is here.
Perhaps it's been hanging over your head for a while, but you've been pushing it to the back burner in favor of other more pressing tasks. And now that the deadline is fast approaching, there's so much to do.
It's time to break the cycle and build the framework for a pain-free (or at least, pain-reduced) tax prep process. The goal isn’t just to take care of things now so you can live through another year of procrastination. It's to develop a system that lays the groundwork for a smooth process going forward.
Planning: Make tax preparation a year-round activity
Yes, we know, making this kind of effort may sound like too much trouble. You just want to finish those returns and be done with it.
But putting off tax preparation causes more that just late nights; it costs money. A recent study found that nearly a third of small businesses were filing under an extension and paying penalties because the tax liability was not paid in full by the tax filing deadline. That’s a lot of time and money down the drain.
Furthermore, it's important to remember that every part of your business affects every other part. Take expenses, for example. If you put a well functioning system for tracking expenses into place, you'll better understand your expenses. This will help you better understand your project costs, which means you'll better understand your tax liability. In turn, you'll better understand your projects. It's all interconnected. Each piece reinforces the other, and the result is a better functioning, more effective company.
We can’t stress enough how important it is to take this opportunity to get your ducks in a row for the future. Use this checklist to ensure you’re setting up the systems to support your entire business from the ground up.
- Turn tax prep into a year-round activity that supports your entire business
- Choose the right tools to make tax prep part of your overall workflow
- Get financial statements into order and become familiar with them so they serve you beyond tax time
- Stay ahead of the news on deductions so you're prepared for future years
- Put plans into place by keeping up on the latest tax law changes and how they affect your business
With all these elements in place, you’re lined up for this year and those to come. You’re not only making tax time less stressful, but also taking control of your company’s financial well-being.
Use better tools to build an integrated tax workflow
How organized is your financial paperwork, especially those pesky receipts? More than one in five small businesses spends over 120 hours on tax prep, not including their external tax professional’s hours. Preparing in advance could cut down on those hours.
Make accounting centralized and safe: Choose the right automated system
It's imperative to set up your accounting system right so that you have continuous access to it throughout the year. This makes your tax prep go more smoothly and supports your overall business.
If you haven’t already, automate your accounting so it’s fully digitized. This serves a number of important functions. It means you’re no longer relying on paper based systems, which are slow and prone to error, and also reduces your fraud risk. Most software syncs with bank accounts and credit cards, so you keep all transactions in one place. When tax time comes around you’ll be able to give your tax preparer direct access to the information.
There are a number of Enterprise Resource Planning systems (ERPs) to choose from, such as QuickBooks, Xero, Intacct and Netsuite. Check out our comparison guide to the best accounting automation tools for a deep dive into which one is best for your type and size business.
Track employee expenses: How to keep them under control and in one place
Expenses can be one of the most difficult things to manage as a business. Employees are often slow to get their expense reports in. Paper receipts can be lost and there’s no way to find them again. Then when April 15 looms, there’s a scramble to collect and categorize them.
There are a number of ways to go about this. The key is to do something so that you’ve put it in place. May we humbly suggest Teampay. Yes, it’s our company, but it’s an innovation whose time has come.
We developed it to help startups and SMBs track and manage expenses safely and securely. They’re not wasting time reconciling cards and hunting down receipts. It syncs with accounting software, inserting clean data into the system.
Whatever platform you choose, be sure that it’s one that makes your life easier and sets you up for success year-round. This problem is not only solvable, but doing so will free you up to do the important stuff.
Get financial statements in order: The documents to complete before you're ready to file
Become familiar with your financial statements, which report exactly what's happening inside your business. Ultimately, you should be reviewing your balance sheet and income statement regularly, to understand the big picture on your company's financial health.
For now, here are the basics on the financial statements your tax preparer will need from you come tax time:
- General ledger: This details all transactions from the year, and is most easily handled with online accounting software.
- Income statement: This report lists your revenue, expenses, and net income (profit) for a specific period, usually a month or year.
- Balance sheet: The balance sheet reports on resources owned by the business (assets), and amounts owed to other parties (liabilities). The difference between assets and liabilities is equity, which is the true value of your business. A balance sheet is based on the formula (assets = liabilities + equity), and the formula must stay in balance.
Each of the above documents must be error free. You’ll end up paying extra to your accountant for cleaning them up and could be liable for penalties if she misses them. Your financial statements must reflect all of your transactions for the year, which means every invoice and expense must be included in your general ledger transactions.
The news on deductions: What you can write off based on your business type and size
As you gain control of every aspect of your company's financial processes, you'll be able to stay ahead of the curve on changes that affect your business. This means making wise choices during the year so you can take full advantage of deductions that are now available.
Fortunately, there is good news for many startups and SMBs this year: new rules have been handed down about deductions. Here are the ones you’re may to be able to take advantage of:
- Research and development: The R&D Tax Credit states that technology companies, biotechs, and other firms can deduct up to $250,000 in costs, as long as the spending meets certain criteria. If the purpose of your spending is to stimulate research and development, your business may be able to use this tax deduction.
- Non-current assets: Thanks to recent tax law changes, you can deduct up to $1M on non-current assets you buy for the business. Known as the section 179 deduction, you’re able to buy large assets and claim the entire amount as an expense in the year of purchase. This lowers your tax burden far more than if you depreciate the asset over a period of several years or longer. The rule includes such purchases as property, vehicles, upgrades to buildings, equipment, and office furniture.
- Retirement plans: Are you a small business with 100 or fewer employees that’s planning to set up a 401(K)? Deduct $500 each year for three years to put it into place, and educate employees about this benefit. More to the point, your business can deduct every dollar you contribute into the plan, and these deductions lower your tax liability.
Confirm each of these tax deductions with your tax advisor.
Tax law reforms: How to stay on top of changes that affect you
The phrase “tax law” might put you to sleep, but if you think of it in terms of opportunities to save money for your business, you might just perk up. And the more you understand the inner workings of your finances, the better you’ll be at becoming aware of how best to structure your business to take full advantage of changes to the code.
For SMBs, the biggest change is the Tax Cuts and Jobs Act (TCJA) of 2017, also known as the Trump Tax Cuts. They went into effect in 2018, and most of the changes are good news (though not all). They affect both C Corps and pass through entities in different ways. Pass through entities are sole proprietorships, LLCs, and other business entities that aren’t C Corps, and the owners pay taxes on company profit through their personal tax returns.
- For C Corps, you’re going to pay a 21% flat income tax. This is generally good news and of course it simplifies your returns, saving you time and money in tax preparation.
- For pass-through entities, you’re allowed a 20% deduction of your business income and certain investments as well. Some limitations apply, and you should ask your tax preparer to break it down for you. The IRS also has a helpful FAQ page.
Several common expense deductions have been slashed by 50 or 100%, depending on the type of expense. This includes everything from client meals and entertainment to giving employees transportation fringe benefits. You should create a separate ledger for these expenses, since there are allowed and disallowed deductions.
Now that you’ve got a handle on how to build the framework for a (relatively) painless tax prep process, you can look forward to better results across your organization. Not only will you have conquered the tax season blues, you’ll have the makings of a stronger company. And when next tax year rolls around, instead of tearing your hair out, you’ll be ready and able to take full advantage of what's available for your business.
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