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Six Steps for Better Tax Organization

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Aug 17

Small business and personal taxesPreparing for tax season can be a task akin to having a root canal procedure. And while paying your fair share to Uncle Sam is part of your American duty, it doesn’t have to cause panic attacks and headaches for the months and weeks leading up to your tax preparation appointment.

This year, let’s toss the shoe box of receipts, make a commitment to set up electronic versions of your general ledger, and roll up our proverbial sleeves for some time and cost-saving tax planning basics.

 1)    Step one - Use a tax organizer.  Most small business accountants and bookkeepers provide their clients with a basic tax organizer. This handy tool outlines what items should be collected and are necessary to complete a tax filing.   Once gathered, these items should be brought to your initial tax preparation meeting. As June is the half year mark for most businesses, it’s a great time to meet with clients and gauge where the business is financially and what possible tax issues may arise for the remainder of the year.

Make your life and that of your accountant’s easier by organizing all of those expense receipts into one neat location.  If you want to digitize them, try an electronic scanning product like NeatReceipts.  This handy software scans receipts for key data such as date, vendor amount, sales tax and even creates an exportable file for most accounting software programs.

2)    What to bring.  Whether or not you’ve used an accountant or tax preparer before, there are still standard items that you’ll need to gather each year.

a)    All of your income and expenses from all sources (interest income, business income, partnership, SSI, investment expenses), preferably organized into categories and totaled.  If you don’t have that you’ll also need to use the services of a bookkeeper to organize the data. Investment income and expenses can include stocks, bonds, mutual funds, real estate, and other investments. Generally investment firms provide statements (either quarterly, annually, or when a sale or purchase has been made) for your records.

b)    Collect income forms. If you or your spouse has income from another employer, you’ll need completed W-2 and 1099 forms from each employer.  These are critical components to your income statement as the original has been filed with the IRS and will be matched to your tax return’s income line.

c)    Get those deductions.  If you have deductible business expenses, you’ll need to provide documentation for every purchase including medical expenses, capital expenditures, interest, and charitable contributions.  Employee-related deductions are often overlooked and can include employee business expenses such as flowers for the secretaries, going away luncheons, brief cases, calculators, supplies, union dues, subscriptions, etc.  The best way to utilize these deductions is to maintain an accurate log of expenses including the date purchased, reason, and proper receipt.

3)    Missing Information?  After you review the materials in your organizer make a list of missing items.  Are there questions that you cannot readily answer?  While you’re pursuing the missing documentation, it is recommended that you continue to schedule your tax appointment and gather whatever data you can.  Once at the appointment, you and your accountant can review the gaps and devise next steps.

4)    Admit to delays and deal with them.  Rather than waiting until April 14th to frantically call your accountant and beg for an extension, it’s better to file the extension early and continue to work on whatever gaps exist in your tax documentation.  You’ll have peace of mind knowing that you have extra time to file and your accountant will thank you for the advance notice.

5)    Any big changes?  Be sure to identify any changes in circumstances (i.e. divorce, home sale/purchase, kids entering college, or the birth of a child).  These life events are often tremendous opportunities to capture additional deductions.

6)    Don’t be surprised by the Self Employment Tax (SE Tax).  For small business owners, this tax amounts to about 14% in addition to your federal income tax. The SE Tax is basically a social security tax for small business and independent contractors.  For example, if you make $50K in self-employed earnings, you’ll owe about $7,000 in self-employment taxes.  So be prepared to pay the tax and don’t shoot the messenger when your accountant tells you that you owe this payment.

If you have complicated tax issues, plan ahead and know that they cannot be resolved on April 14th. No matter what business finances issues you have, it is advisable to address these issues throughout the course of the year so there aren’t costly surprises in April.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

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