October 26, 2020
Business Tax Prep Tips
- Use payroll tax software to avoid costly IRS penalties. Approximately one third of all companies get fined each year for incorrectly handling payroll taxes. This is due in large part to the fact that around 40% of businesses with employees try to handle payroll on their own, using paper or spreadsheets, without assistance of a third party.
- Keep business and personal finances separate. A common mistake of small business owners is to commingle business and personal funds. It’s important to have separate bank and credit card accounts for your business.
- Get organized. Set up a filing system to keep all of the paperwork you accumulate in one place. Block out a couple of hours each month to organize all of your paperwork. Reconcile your bank and credit card accounts by matching your receipts with the statements received from your bank.
- Use accounting software to track revenue and expenses throughout the year. Assuming you have a working knowledge an accounting software program can help make tax time a breeze You can quickly create financial statements prepared to send to your CPA or tax professional so they can file your tax return.
- Forecast cash flow. Build a cash flow forecast to estimate your tax impact and prepare for your payments.
Business Tax Deductions
- Take the home office deduction. If you use part of your home for your business, you may be able to deduct a portion of expenses. However, you must meet the requirements to take this deduction. Your CPA or tax professional will be able to determine if you do.
- Take the auto expense deduction. If you use your car in your business, you can deduct car expenses. You can choose one of the following methods for this deduction: standard mileage rate for 2020 is 57.5 cents or actual car expenses which include expenses like gas, repairs and insurance. However, if you choose the actual car expenses then you must calculate the percentage that the vehicle was used for business purposes first and then apply that percentage to the total car expenses. Your CPA or tax professional will be able to help you determine which option will get you the greatest return.
- Meals and entertainment. You can deduct 50% of meals that are considered business-related. This includes taking a client out to lunch. Entertainment is not deductible like tickets to a football game even if you are taking a clients. However, the meals provided during entertainment can be deducted if paid for separately. For example: You treat a client to a baseball game (which you also attend) and pay for beers and food while at the game. Since you paid for the beer and food separately, you can deduct 50 percent of the cost. You can’t deduct the cost of the tickets.
- Donate unused inventory. If you have unsold or unused inventory, donate it and get the tax deductions instead of spending cash on storing it. Be aware that donations of goods greater than $500 have stricter reporting rules, and once you exceed $5,000 an appraisal is required.
- Take the Section 179 deduction. This deduction allows you to recover the full cost of equipment or property up to $1,040,000 that you purchased for your business in the same year that you purchased it.
- Consider setting up a retirement plan. A retirement plan can provide several benefits for you, your business, and your employees. Here are a few of the benefits: employer contributions are tax-deductible, assets in the plan grow tax-free and you are able to attract and retain better employees.
Filing Your Business Tax Return
- Consider using a tax professional. An experienced tax professional has seen everything and knows how to get you the most favorable tax deductions and benefits. This usually saves the taxpayer or business at least as much as the fee the CPA or tax professional charges, plus you get the added benefit of being sure that your returns were prepared and filed properly.
- File on time. Do your best to file your tax return on time. If you fail to file your tax return on time and pay any taxes that are owed, in addition to interest, you will be assessed the failure to file and pay on time penalties.
- Take responsibility. If you do hire a CPA or tax professional to prepare your tax return, have them go over the return with you. Make sure that you understand and agree with the information they are reporting.
- Check out the IRS video portal. You will find a section dedicated to small businesses.