It’s hard enough to run a business without having to worry about tax returns each year. Experts recommend that you work with your accountant all year and not just during tax season. John Blake, CPA in Hamilton, N.J., states that making financial decisions without consulting an accountant/financial adviser can place you at risk and ultimately cost you more.
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These are the top nine best practices for small business tax preparation and small-business accounting.
1. Find the best accountant
An accountant should be able to offer more than just financial statements and tax preparation. If they only offer this, they may not be the right accountant to help a small business.
Your accountant should be there to help you track income and expenditure, to ensure you have cash flow, and to monitor gross and net profit. Your accountant should be there from the beginning of your business’ opening, and not only during tax season in March or April. He says that most small businesses don’t realize the importance of accounting in order to sustain and grow their businesses.
2. All income reported to the IRS can be claimed
To match your income with what they have, the IRS will request a copy of any 1099-MISC forms that you received. Blake advises that you ensure the income you declare to the IRS is the same as the income reported on the 1099s. The IRS will flag this as a problem. Even if the client does not send 1099, it is still necessary to report the income. He says that the same rules apply to state taxes.
3. Keep accurate records
Your tax return will be accurate if you keep detailed and accurate records throughout the year. Blake warns that if you don’t keep accurate records throughout the year, you may be missing deductions or worse, could put yourself at risk of being audited. Blake suggests that every business purchase a basic accounting software program. It is easy to use, affordable and can help you track all of your income and expenses.
4. Separate personal and business expenses
Blake states that if the IRS audits your company and finds personal expenses mixed in with business expenses, it could look at your personal accounts for commingled funds. You should always have a separate credit card and bank account for your business so that you can only pay business expenses.
5. Learn the difference between gross and net income
No matter how many units you sell, if your product is more expensive to produce than it costs to sell, you’ll lose money. Bhansali believes that small business owners forget to account for the difference in their net and gross income.
If you make your product for $100 and sell it for $150, then your gross income would be $50. He says that your net income could drop to $10 if you subtract expenses. Bhansali states, “It is important to know your gross and net profit so that you can be more profitable.
6. Correctly categorize your business
Blake warns that failing to correctly classify your business could lead to overpaying taxes. Your taxes will be affected by how you classify your company. Small businesses should consult an accountant and attorney to decide how they should be classified.
7. Manage your payroll
Blake recommends that you hire a company to help with payroll. However, make sure the company is reliable. Some business owners hire less-known payroll services to save money. However, they later discover that the service didn’t pay the payroll taxes. Blake states that if this happens, business owners will be responsible for paying payroll taxes. The IRS usually checks quarterly to verify that payroll taxes are paid.
8. Ask your accountant for advice about your business plan
A good accountant can give you valuable advice about how to grow your company. Ask them for their opinion on how much you should contribute to your retirement account and whether or not to take a bonus. You can ask your accountant if renting or buying small spaces for your business could be a better option.
9. Capitalization rules: Take advantage
You may be eligible to deduct significant amounts if you purchase tangible property or equipment for your company. Your accountant should be familiar with capitalization rules.
