We are 1 month into the 2020 Filling season quickly approaching the filing deadline for flow-through entities. As the prudent business owner, you are I am sure you have filed your return weeks ago. Are you ready for next year?
Of course, you’re not. For many business owners, the stress and uncertainty around tax season is nothing to look forward to. For our clients, the approach is to actively manage and assess the potential tax liability during the year in order to make filing taxes nothing more than checking the box.
Currently, you are highlighting bank statements, reviewing invoices and 1099’s, tracking down receipts trying to recall what took place 9 months ago. By the time, you are done, the thought of tax season is the last thing you want to think about.
It might be a little too late to ease tax season for you this year, but once you’ve recovered from it, here are 4 things you can do now to make sure next year’s taxes are way easier than this year’s:
Are you ready for next year?
- Have a separate account for all your business income/expenses:
At the very minimum, separate your personal and business bank accounts. Establishing a method of maintaining a bank account strictly for activities related to the business not only shows authorities that you are running a genuine business it will make filing your taxes easier as well.
Open a new checking account (doesn’t have to be a business account if you’re not ready for that yet!), and deposit all your business income into it.
Use the associated debit card to pay for all your business expenses. Transfer money from this “business” account to your personal account each month to pay for your personal expenses. Depending on the size of your business and the organizational structure drawing a salary may be a part of this equation.
Is it ever too early to start? Not opening a separate account sooner rather than later only delays the inevitable. Time and time again I meet with owners who didn’t do this in the beginning. When the time comes, it is not the time it takes to set up a checking account. The issue is everything that is tied to the old account. If you think about all the automatic bill payments, customer payments and sometimes even payroll. The process to unwind and re-establish all these items is the headache. So, owners simply don’t do it.
If you don’t already have this setup, you will be so happy you did come this time next year.
- Start tracking your business finances now:
With the increasingly cost effective and easy to use software solutions there is no reason you shouldn’t be tracking your expenses today. While you may not need a full-time bookkeeper to get the job done. There are outsourced options that can be a great resource as you move through the year. The biggest take away being planning for yearend will give you many more options than after the year end. Our monthly clients are provided a complete set of monthly financials as well as insight into their potential tax liability quarterly for roughly 1/5th of what a full-time book keeper costs.
Once every two weeks or every month, go in and categorize your expenses better yet allow your outsourced bookkeeper to do it and have peace of mind that it is being done correctly. The software will do 90% of the work it just needs to be told what is what. Most software such as QBO will remember how a transaction was classified and automatically do it for you the next time. This is where the magic happens.
- Have a way to keep track of all your receipts and separate your cash spending:
I’m sure one of the pieces of advice you got from someone when you told them you were starting your business was, “Make sure you keep your receipts.” You think you’ll be diligent about it and then one day, you’re not.
The main purpose of keeping receipts is in the case of an audit. If an auditor wants to see exactly what you bought at Staples or Costco to make sure it was all business expenses, he will need to see the receipt (also why showing an audit your credit card statements won’t cut it).
We encourage our clients to use hubdoc. It is an online storage solution that allows companies to keep track of their receipts in one place. It is mobile friendly and works well with other software. It is better than keeping a shoe box full of receipts that you have no idea whether they are pertinent to your business or not.
- Pay your taxes along the way:
To pay or not to pay estimated taxes? For a lot of small business owners they don’t have a good grasp on the businesses finances so making estimated taxes is literally throwing a dart. If it’s your first year, how do you even know what to estimate?
The reality is though, unless you’re super diligent about putting away money for taxes every month, doing quarterly payments can keep you out of a lot of trouble once next year’s March/April deadlines roll around.
For our clients, we have 2 objectives when it comes to the yearend tax liability
1) Have a good grasp on what it looks like. We want to provide our clients within relative certainty what can be expected at year end.
2) We do not want to be in a situation where we are paying under payment penalties
There are two “safe harbor” provisions that the IRS allows which will prevent the tax payer from incurring penalties for underpayment of their tax liability. If during the year you pay:
- 90% of this year’s tax liability, or
- 100% of your prior year tax liability
As you can imagine it is relatively easy to calculate 100% of last year’s liability the 90% of the current year liability can at times be hard to predict. Once you have worked with your accountant to see what your tax situation looks like set the money aside and pay your
online at EFTPS.gov.
Do keep in mind when you kill it this year and blow it out of the water you will owe more contacts next year, so be diligent about setting aside additional funds to pay potential taxes.
Push through this filing season and make it a priority to get these 4 items set up ASAP and next year, you will rest easy knowing well in advance your tax situation.
If you are interested in learning more about how we help our clients manage their tax liability proactively during the year, please contact us at [email protected].