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, and 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. Accounting isn’t as scary when you take a step-by-step approach to prepare your year-end accounting and subsequent tax preparations.
Here’s some encouraging news. You aren’t alone on this financial journey. Accountants, bookkeepers and tax professionals have been managing these deadline-driven tasks for generations so there are tons of resources already available to small business owners. Here are some 3 common areas of concern explained in down-to-earth language you’ll easily understand.
3 Areas to Start Your Tax Year Right
1. Close Out Your Business Tax Year and Prepare for Taxes Filing
This 25-minute Year-End Wrap Up details the steps necessary to close out your business accounting accurately 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 bullet points below as a handy reference guide:
Closing the Books:
- Capture and classify all activity from your bank, credit card, petty cash, asset & liability accounts
- Record business expenses from personal funds
- Reconcile all balance sheets accounts
- Deep-dive of balance sheet & profit & loss accounts – it’s simply a line by line review
- Payroll audit & reconciliation
- Review owner’s transactions (Sole Proprietor)
- Review shareholder’s transactions (S Corporation)
- Prepare annual payroll forms (W2s)
- Prepare annual contractor forms (1099 Misc)
- Prepare annual tax-related forms (1099s)
- Final review of financial statements for tax preparation
Preparing for Tax Filing:
- Provide correct tax basis for a tax pro
- Prepare asset list for depreciation calculation
- Prepare mileage log for auto expense deduction
- Provide required permanent docs for tax preparation
- Provide current ownership information
- Line by line matching of draft tax returns
- Post-tax adjustments
- Close books
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 extremely important 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 the types of deductions available.
You can streamline the year-end process by implementing good accounting practices each month. 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, he or she may suggest that you change your business structure (for example: 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.
If you are ready to file your taxes, we invite you to check this guide on how to file taxes for your small business.
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