While most people don’t think of tax season as an exciting time to look forward to, it doesn’t have to be something you dread either. As with most things, you’ll be okay if you prepare ahead of time and know what you’re getting into.
And while tax season itself and the deadlines it carries with it are still many months away, we’re entering an important time for tax preparation: the end of the year.
If you wait until the next year to start gathering your records and tax data, you’re going to make it a lot harder for yourself than it needs to be. There’s a lot you can do in your year-end accounting to optimize your tax situation and prepare your small business tax return early.
What Year-End Accounting Practices Should Small Businesses Use?
For your 2020 tax return, you are only responsible for your income and expenses between January 1, 2020 and December 31, 2020. As the end of the year approaches, you are approaching your final chance to change how your taxable income will be calculated.
Here are a few different strategies to consider for improving your accounting before the end of the year.
1. Consider Your Deductions
The end of the year is significant for tax deductions. Deductions depend on expenses and contributions you make during the same tax year as the taxable income you received. That means you can’t wait until January or February to make your tax-deductible expenses.
Maximizing the money you get back on your tax return requires deducting business expenses for everything you can. You still have time before the end of the year to donate to charities, contribute to your retirement savings account, and schedule large business expenses. All of these represent opportunities for deductions.
2. Get Organized
Ending a year is like ending a chapter in your life or the life of your business. You have an opportunity to close that chapter and begin a new one in a way that sets you up for success with organized recordkeeping.
Take a deep dive into your bookkeeping records this fall and make sure they’re as organized as possible. Your final tax bill or refund will depend directly on how well you did your bookkeeping, which means careful records of both income and expenses. To make money, you have to spend money, and you should reflect this on your tax return.
3. Review Your Records Carefully
Group together as many similar transactions as possible and set apart any major purchases made throughout the year. Clearly identify refunds, income, and owner contributions. All of those sources of cash may seem similar on paper, but they mean totally different things when it comes to accounting on your tax return.
Never wait too long to reconcile your bank account and categorize your transactions accordingly. If you let months go by before you go over these files, you’re not going to remember enough to do this accurately and efficiently.
Thorough recordkeeping for a small business may seem manageable at first, but it can quickly become overwhelming. If you’re struggling, be sure to reach out for assistance before submitting your information for tax preparation.
4. Consult with Your Accountant Before Year-End
The end of the year provides you with the perfect opportunity to review your finances with a tax accountant and make sure you’re situated well in advance of your tax deadlines.
This is also your chance to get ahead of the game and avoid any nasty surprises later on. Meeting with an accountant now gives you the chance to make changes before the end of the financial year if something has come up.
Ask your accountant about any new updates or changes to tax law that you need to know about. You should also check in about any possible limitations on deductions you want to claim, like vehicle expenses or home office deductions.
Make sure to go over the accounting process and everything that is expected of you as a client. It will save you time and headaches later to know exactly what you need to do on your end.
Meeting with your accountant gives you the ideal time to bring up and address any unresolved tax notices before year-end. You don’t want those hunting you down later on or affecting any possible tax refunds.
5. Estimate Your Liability Ahead of Time
Knowing more or less how much you’re going to owe in taxes in advance can help you prepare effectively to pay it and find all of the deductions you might be eligible for.
First of all: If your business has been successful over time, it is safe to assume you’ll be getting a tax bill when the time comes. The goal is to lower that eventual bill as much as possible.
Let your accountant know about any major inflows of unexpected income, including retirement account withdrawals and any increases in your self-employment income. An accountant needs all the information to be able to calculate your tax liability effectively.
Don’t forget about your personal income, either! Multiple incomes can make predicting your tax liability more complicated. If you have a job that provides a W-2, you may have already paid some of your tax bills in advance.
The opposite is true as well, however. Your income from the W-2 job can end up causing you to owe more taxes than you expect. Be sure to ask your accountant!
6. Pay Your Quarterly Taxes
You also need to be paying estimated taxes ahead of time to avoid fees later on.
Take every chance you can to pay your estimated quarterly taxes. These are pre-payments to your tax bill based on what you expect to owe in a final accounting. Don’t panic if you miss the quarterly tax deadline, but focus on making the payments when you can.
Here are the quarterly estimated tax deadlines:
- Quarter 1 Deadline: April 15
- Quarter 2 Deadline: June 15
- Quarter 3 Deadline: September 15
- Quarter 4 Deadline: January 15 of the following year
Keep in mind that taxes in the United States work as a pay-as-you-go system, so you are meant to pay most of your taxes during the year as you receive income. That’s why it’s better to pay a little more in estimated taxes than to underpay.
If you underestimate your estimated taxes, you could leave yourself with a large tax balance at the end of the year and get hit with underpayment penalties.
7. Take Control of Your Tax Bill
The end of the year is a good time to be proactive in managing your tax bill. There’s a lot you can do to ease your tax burden!
Make sure that you have accounted for absolutely all of your expenses. Look for business expenses you might have made through a personal checking account or others paid in cash. All of them count, so don’t leave them out!
Spend time calculating your total gross receipts. Overstated receipts lead to paying unnecessary taxes, while understated income numbers can mean penalties with the IRS further down the road. You don’t want either to happen to you.
Other strategies will depend on your situation. Consult with your accountant about tax-saving strategies that might work for you. You might get some benefit from changing your business entity classification or simply by putting aside some money for retirement. All of these can help lower your tax bill.
8. Take the Time While You’ve Still Got the Time
It takes time to get your taxes done right, and there’s no better time than the present to invest in future savings.
When working with a professional tax consultant, you need to allow them a reasonable amount of time to review your information and provide you with a completed tax return ready to file. Try not to wait until the last minute in April and reach out to an accountant only one to three weeks before your due date.
You’ll get the best result if you give your accountant at least five weeks before your deadline to work through your return with you. If you can’t meet the deadline for whatever reason, you might ask your accountant if filing an extension is right for you.
Keep in mind, extensions allow you more time to file, but they don’t give you extra time to make final payments on your tax balance.
However you decide to proceed, your company’s finances are in your hand. It’s up to you to seek out experts, inform yourself, and make the right decisions for your business.