As a small business owner, you know that January signals you’re about to get knee-deep in your tax year: that means diving into 1099s, W2s, payroll taxes, sales taxes, reconciliations, business taxes… You also schedule frequent visits to see your accountant. You may even dread “year-end wrap-up” conversations that make you want to run and hide.
But accounting doesn’t have to be scary if you take a step-by-step approach to prepare your year-end accounting and subsequent tax preparations.
The best part? You aren’t alone on this financial journey.
This article will help you start your tax year successfully so you can start concentrating on your business growth.
3 Areas to Start Your Tax Year Right
Accountants, bookkeepers, and tax professionals have been managing these deadline-driven tasks for generations, so there are tons of available resources to small business owners. Here are some 3 common areas of concern explained in down-to-earth language you’ll easily understand.
1. Close Out Your Business Tax Year and Prepare for Taxes Filing
This 25-minute Year-End Wrap Up details the steps necessary to accurately close out your business accounting and complete the tasks to prepare your books for this tax year and business tax preparation. For your convenience, you can pause the video at any time, take notes, and then continue at your own pace.
Keep the checklist below as a handy reference guide:
2. Understand Why Reporting Miscellaneous Income Is Important
The most common form that business owners prepare every tax year is the 1099- MISC form. Because you may not be sure which vendors or individuals should receive the forms, what rules to follow, or how to prepare and deliver the forms on time, you should refer to IRS publications about specific 1099 forms.
Your tax professional can prepare the forms for you at your request.
There are numerous 1099 forms to report interest, state and local refunds, pensions and retirement payoffs, real estate sales, rent, and other types of income.
Here’s one example. If you pay individuals at least $600 for contracted services, you should send them a 1099-MISC form showing the non-employee compensation. Keep in mind you don’t send 1099-MISCs for services provided by corporations. Because there are exceptions to this general rule, always follow guidelines supplied by the IRS, which can be found online or in a printed booklet.
Make sure you send these income forms to recipients by January 31st for the prior calendar year or tax year. The IRS charges businesses penalties for sending forms late during the tax year or for not sending them at all. Moreover, it’s crucial to issue forms with correct social security numbers and your payer identification number. You should send out a corrected form immediately when there’s an error.
3. Understand Why the Year-End Process Is Important
As a business owner, you probably review your financial statements each month to keep apprised of financial upturns or downturns. By the time December gets here, you’ve been reviewing your finances all year long. If you don’t, it’s a good accounting habit to practice.
It’s important to review transactions line by line to make sure income and expenses are posted in the correct accounts. Assets must equal liabilities on your balance sheet, and the income statement will show profit or loss for your reporting period, which is usually annually (but not always; it depends on your business model).
Review your records early in December to determine if your business will make a substantial profit during the tax year that is about to end. You can spend down the profit by purchasing equipment, supplies, and other items, which usually keeps you from paying as much income tax. You could also invest profits by opening or making deposits to a retirement account or making donations to a favorite charity.
Depending on your accounting method, you may be able to take deductions for a decreased market value in your inventory. Your accountant can advise you before the year ends on the types of deductions available.
You can streamline the year-end process by implementing good accounting practices each month.
It’s Time to Start Your Year Right!
Another important component of tax preparation is to sit down with a tax professional each year and review your business plan and goals. Find ways to legally reduce the amount of income tax you pay. Your accountant can recommend tax strategies to use starting in January for the upcoming tax year.
For example, they may suggest that you change your business structure (i.e., switch to a Corporation).
Once you develop an action plan, you can put it into place right away. When the tax year ends, you may even look forward to tax time because you’re prepared and your records are in tip-top shape. Instead of feeling overwhelmed at year’s end, you’ll know what financial improvements you want to make next year.
Do you want to receive more useful tips like the ones in this article? Subscribe to our weekly Newsletter. It’s free, and you’ll get tips and the latest trends in business and finances to make your business grow.