For many business owners, tax season can be a mad scramble involving document hunting and filling out heaps of forms. The whole process may feel quite stressful and overwhelming; however, it doesn’t have to be. Starting your business tax preparation process well before the deadline will make your life way easier, especially if you want to claim deductions. Follow these tips to prepare your business for the tax season and enjoy a smoother tax filing process this year.
Separate Business and Personal Expenses
Not separating your business and personal expenses can be a huge problem during tax time. Sorting out the two expense categories after the fact will take more time, and you might miss out on some deductions. In addition, you may attract IRS scrutiny if you mistakenly claim a business expense as a personal expense or vice versa.
If your expenses aren’t correctly categorized, it will be more challenging to create accurate monthly financial statements, which can further complicate tax season. Keep your finances separate, whether your business is a large enterprise or a small side hustle. A separate checking account or a business credit card will help you stay on track.
Reconcile Balances for All Your Accounts
Create an inventory list for all your business’ financial accounts, including savings and lines of credit. All transactions on all business accounts should be included in your bookkeeping to keep track of your income and expenses. After identifying your accounts, you can categorize your transactions into expenses and income to help you examine your business’ cash flow. A reliable inventory of your business’ financial holdings will help you avoid oversights and miscalculations during tax season.
Keep Track of Business Expenses Contributed from Personal Assets
During the initial years of business development, it can be easy for business owners to invest their personal assets for business without realizing it. Most people may remember their significant personal contributions to their businesses, such as mobile devices and computers. However, monitoring smaller expenses such as client gifts, postage expenses, and mileage is also important because these little things can add up to substantial amounts.
Prepare Financial Statements
All your financial statements should be compiled into annual reports at the end of the year. With annual reports, you will have all the information needed to fill out Form 1040 and accurately file your taxes.
Depending on the nature and size of your business, you may need accounting software to generate monthly financial reports. Financial reports will inform you about your company’s financial health and performance. Income statements will tell you how much you are earning and spending, while balance sheets will show you your liabilities and assets or what you owe and what you own. Cash flow statements will show how much money you have to operate with. Examined together, these reports provide a clear summary of your company’s financial performance.
If you still depend on paper records, you are making your business more complex than it needs to be. Printed receipts, photocopied invoices, and handwritten ledgers are easy to lose and difficult to share with your bookkeeper and other stakeholders in your company. There are cloud-based software tools that can help you manage all your purchase orders, receipts, invoices, financial statements, and reports from a single location. When you go digital, all your crucial business documents will be easier to organize, shareable, and harder to destroy or lose since they are stored in the cloud.
The tax season can be overwhelming for businesses that do not prepare themselves all year round. These simple bookkeeping strategies will help you keep your books in order so you have all the resources you need to file your state and federal taxes. You can also hire a professional bookkeeper to track and categorize your daily expenses and create financial reports. With an expert at your side, you can improve the accuracy and efficiency of your bookkeeping for an easier tax season.