How to Panic Proof Next Tax Season
Another Tax Day has come and gone; this time delayed by an impeding pandemic. Maybe you were prepared and filed on time, or maybe you are just avoiding it all together as a means for self-care. Either way, there are ways to better prep for the tax process that are way less stress and probably less money than the headache you may currently be navigating. Here are few tips to get you set up for a much smoother process next go around. Here’s a list of post tax day hacks to help ease the tax season process.
Hack #1: Bookkeeping
You probably already know how important it is to implement a bookkeeping system into your business practice. However, what you may not know is how this affects your tax return. So really simply put your business income tax is based on the money you make and spend throughout a given period. This information goes from your bookkeeping software into your tax return. Tracking this information in detail can and will save you money. And because you are busy running your company you probably want the easiest way possible to track this information. The good news is you have a couple of options:
DIY: Do it yourself options tend to be the most cost-efficient. I have seen business owners with everything from an Excel spreadsheet to a barely managed QuickBooks file. My suggestion would be to make it as easy on yourself as possible that way you can devote more of your time to the things you love doing and less of it to that which you don’t enjoy so much. Spend an hour browsing the top 2–3 cloud bookkeeping options like QuickBooks, Wave, Xero etc. Find the one that fits your budget (as low as $5/mo) and ease of use and subscribe. Then all you have to do is connect your accounts and credit cards and get to sorting your income and expenses. Hack: Most of these platforms have a rule setting feature that will automatically sort some of your repetitive charges (ie. categorizing all amazon charges as office supplies). Get this process in place early and check it one time a month and you are sure to save yourself panic at tax season. Not mention having ready financials upon request for funding needs.
Pay for Help: Maybe the thought of bookkeeping scares you so much that you break into hives or you have enough room in your budget that you can outsource that service. If so, there are a few options here that I would recommend. The first is Bench Accounting, for a flat fee (starting at $139/mo) they will provide a dedicated bookkeeper and software to track finances. Similar services include Xendoo, and Pilot. QuickBooks also offers a new service called QBLive which will assign a live bookkeeper to your account to help manage the process starting at $200/mo.
Hack #2: Receipt Tracking
I get a lot of questions about if whether or not it is still required to keep track of receipts. At one point in time, before computers and cloud bookkeeping, the only way a client could prove a purchase was with a receipt provided at purchase that was meant to tie to the companies accounting ledger. The idea is that the receipt verifies what you say to be true in your books. Think of it as an extra point of proof. In the event that there is an audit the auditor may ask to see confirmation, so it is better to have then not. With that being said, I have been in audits where the auditor was fine with bank/credit card statements as verification. However, sometimes those statements are vague and don’t give much detail except a date and amounts. A good rule of thumb is just to get in the habit of tracking all the receipts. Be sure to ask for receipts for cash transactions and specifically when the business is reimbursing the buyer for a purchase paid with personal funds. This sounds daunting I know but the good news is there are simpler ways to do this then a shoe box:
Bookkeeping Software: QuickBooks (and I’m sure other software) has a receipt scan feature that allows you to scan the receipt in the QBO app and that scan is then read and dumped into a virtual receipt box in your QBO account, where you can then sort and create an expense for it to match to your bank feed. This is probably the easiest and most efficient process. It takes your receipt from photo to category to match seamlessly. Also, once you take the photo you can dump the receipt. No need to keep allowing them to pile up in your car to, at some point, dump on a CPA at tax season.
Scanning apps: Another option is scanning apps (usually free) that will allow you to use your smart phone to take a photo and turn it into a scan and save it in a file. This is a good option if you usually just use credit cards and all of your purchases can be traced back to a statement. Then the receipts are just serving as a backup. Keep them for 4 years (statute of limitation period) and then toss.
Hack #3: Mileage Tracking
I think this tends to be the most ignored area of all deductions. Rightfully so, its daunting to think about actually tracking your miles. Who has time for that? Take a second to think about your business structure, maybe you are home based and do everything online and do not have a need to track miles. However, if you are running a business that has to travel to visit clients, and/or provide services then you should be tracking your miles. The rate as of January 1, 2020 is 57.5 cents per mile for business use, 17 cents per mile for medical or moving expenses, and 14 cents for service of charitable organizations. This means that for every mile you drive you get to take a deduction on your tax return that calculates at total miles driven multiplied by the rate. However, it is important to note that the IRS has cracked down on companies claiming this mileage deduction expecting accurate proof of miles driven. And thanks to technology there are simpler ways to do this as well. Some examples are MileIQ, SherpaShare, TripLog, and Hurdlr. All of these apps do generally some version of the same thing: track the miles every time you take a drive that you then have to sort whether its business or personal. At the end of the year, you get a handy report with exact mileage. Voila just like that you get to claim the deduction. Be careful assuming that you can just estimate this number.
Hack #4: Think Big
I give this advice to all new business owners: do not just think about what your business is think about what it can be and prepare for that. By this I mean, when managing your business finances you see a business bank account with $100 in it and think you have nothing to worry about when it comes to bookkeeping. However, if you set your process up while you are small, then as you grow, accounting management becomes a lot smoother. It is much easier and cheaper to start it in a good place then to attempt to clean up a mess that got out of control because you grew faster than you thought. Also, be careful about assuming that someone else can just take over all of your finances without you having an understanding of things as the business owner. I hate to see owners just hand things over to me without understanding at least in general what is going on, this is how fraud happens so easily. You wouldn’t give your personal bank accounts to someone else to run without oversight so why do that with your business.
Hack #5: Calendar Tax Deadlines
There are a few tax deadlines that happen in between “tax day” that you need to be aware of:
· Estimated Tax Prepayments (due quarterly for federal and state income tax)
· Sales Tax Payments (usually due quarterly or monthly)
· Payroll Tax
· State Annual Report
· Business License tax
· Business Property Tax (if applicable)
Knowing what is coming due can help you budget better so you are not hit with trying to figure out how to cover a fee the business may not be able to afford all at once. Also, calendaring will help prevent penalties and interest on late filings. Its estimated that small businesses pay up to $60 billion a year in penalties and interest due to late filings and late payments. And thanks to ComplYantapp.com, you can now do this much easier. ComplYant provides all applicable due dates and reminders, as well as a notice reviewer feature to help figure out what to do about notices received from a taxing authority.
I hear all the time that ‘you don’t know what you don’t know’. So hopefully you read this feeling like you know a little more. And I assure you that if you take the time to set up some automation processes then you will save yourself loads of time, headache, and money in the long run.
All our best.