Tax season approaches quickly, especially for busy small business owners who are focused on day-to-day operations. If you have to gather tax information in a hurry, there is little chance of planning or optimizing your tax situation. A disorganized organization can also cause you to miss out on valuable deductions.
It's important to start preparing your taxes early to avoid costly mistakes and prepare your business for a streamlined tax season.
Year-end adjustment tips
Preparing for tax season is extremely important. Consider these year-end strategies to make tax season stress-free and organized.
1. Compare last quarter's financials.
If your small business has been in operation for a while, you know how things tend to go in the last few months of the year. AJ Gross, president of ALG Tax Solutions, says understanding your business is essential to making accurate forecasts.
“We need to know how the business is going to perform throughout the fourth quarter,” Gross said. “Whether we plan for growth or a recession is based on the overall year and business cycle.”
For example, let's say your seasonal business ends during the summer and sales slow down significantly during the holidays. In this case, you should prepare for the expected year-end slowdown. Conversely, if you own a retail store, you know that your business and employees will be busy when Black Friday rolls around.
Most small businesses use the previous year's numbers as a starting point to compare and plan next year's estimated taxes. Examine the results for the past three quarters to see how they differ from the previous year's results.
If you find that your estimated income taxes for both years are similar, use that information to decide whether you should pay more due to your increased income or save money for when you file your tax return. judge.
“They don't necessarily want the government to keep their money, so they can pay the bare minimum,” Gross says. “But it might be good to have a certain amount saved in case you know you'll have to pay taxes based on a better year.”
2. Consider year-end investments.
Each time you incur a deductible expense, it reduces your taxable income and generally reduces your tax liability.
One way to increase your tax credits is to make upgrades and capital improvements near the end of the year. John J. Petosa, a certified public accountant, attorney, and faculty member at Syracuse University's Whitman School of Business, urges businesses to proceed with the purchase of necessary new equipment and other business assets that qualify for the Section 179 deduction. I advise you to consider it. Under this deduction, small business owners can deduct all or part of the cost of certain qualified real estate in the year they put the item into service, rather than spreading the deduction over several years. .
“If you've been waiting for that new computer system, you might as well buy it.” 1713328889 and started operation this year [and] By writing it all off, you reduce your overall taxable income,” Petosa suggested.
But Gross added an important caveat: Your purchases must make sense in the short-term or near-term. “You only want to make investments that will improve the profitability of your business,” Gross warns. “If profitability doesn't improve, there's no point.”
For example, if your tax rate is 30 percent and you purchase a $50,000 machine and take the deduction, you will save $15,000. If the machine can help you grow your business, it may be a wise choice. If you don't, you'll end up spending more on the machine than you'll save in taxes.
Consider making upgrades and capital improvements near the end of the year to increase tax credits and reduce your business' tax liability.
3. Review your retirement plans.
Perks are an attractive way to attract and retain top talent. Although many small businesses offer outlandish perks to sweeten the deal, the proven benefits of a retirement plan are still a huge boon for workers.
Tax season is a great time to consider your retirement plan options. Small businesses can choose from qualified retirement plans beyond the typical 401(k) plan and IRA. For example, a Simplified Employee Pension (SEP) plan allows you to save up to 25 percent of your income (up to $66,000 in 2023).
“The good thing about some of these plans is that if you create a SEP, you don’t have to fund it until the filing deadline, and if you file for an extension, you can fund it until the extended deadline. Even if you have a deduction,” Gross explained.
If you need to file for a small business tax extension, be sure to estimate your tax liability and submit your payment along with your extension form.
4. Check for obsolete inventory and uncollectible debts.
Unfortunately, some products may not sell or debts may not be collected. Neither situation is ideal, but your taxes could be reduced.
In normal business, inventory costs are deducted when inventory is sold. However, Gross says you can dispose of items you can no longer sell and deduct the original cost as an expense.
Similarly, if someone owes your business money and your debt collection strategy fails, you may be eligible for a deduction. Note that you cannot take a deduction for income that you do not recognize. For example, if you operate on a cash basis and your customers don't pay their bills.
5. Leverage business flexibility with cash accounting.
Think carefully about when to send and receive payments near the end of the year. “If for some reason the end of December is approaching and you have the option to defer receiving your check until next year, you may be able to do so because you did not receive your cash until the following year,” Gross said. Ta. Said. “It's the same with expenses. After you write the check, until it's cashed. [next year], that's the current year's expenses. ” Please note that credit card charges are always recorded in the year the transaction occurs.
By planning your year-end cash flow, you can essentially accelerate your spending while deferring income and reducing your tax bill this year, Gross says.
Cash accounting and accrual accounting are different. Cash basis businesses record income and expenses when money is received. Under accrual accounting, a company records revenue when it is earned and expenses when it is incurred.
6. Hire a small business tax professional.
Filing a tax return as an individual is relatively easy thanks to accounting software applications and other tax solutions. However, if you own a business, you may want to hire a professional to prepare your taxes.
U.S. tax law is incredibly complex. Failure to properly file income and payroll taxes can spell disaster for small businesses. Failure to pay business taxes can result in tax liens, levies, wage garnishments, and, in some cases, the ruin of your company.
Gross says the 2017 Tax Cuts and Jobs Act made some things harder if you pay your own small business taxes. “The latest changes actually make things more complicated for small businesses because they change what they can deduct and how,” Gross said.
For example, the law allows a 20 percent income tax deduction if you own a pass-through business, such as a sole proprietorship, partnership, or S corporation, but married people who own certain businesses, such as law firms or medical clinics, can be deducted. You can only claim if your annual income is less than $315,000 (or $157,000 if you are single).
The cost of tax preparation services varies depending on the size and complexity of your business and the expertise of your tax professional. If you only have a few employees, costs can start around $500. In large companies he may pay more than $2,500. Either way, Gross suggested hiring a tax professional if you have any doubts about whether you need help.
“Established businesses should probably hire a tax professional just because of the necessary deductions and tax planning,” Gross says. “If you hire a professional, you're definitely less likely to do something wrong and get into trouble.”
The Tax Cuts and Jobs Act of 2017 also changed or limited certain deductible business expenses. For example, a certain percentage of business dinners and lunches can still be deducted, but companies will no longer be able to expense leisure activities such as tickets to concerts or sporting events.
7. Donate to charity.
Many companies engage in philanthropy to do good, increase their business presence in their communities, and reduce their taxable income. Your business must have some business purpose to deduct donations. For example, in return for your donation, you can receive advertising space or your name on the stadium fence.
You can also deduct other types of charitable contributions by itemizing deductions on your personal income tax return.
8. File your year-end tax return.
The information below and other tax, business, and payroll forms are expected to be filed shortly after the end of the year.
- Form W-2, Wage and Tax Statement; and Form W-3, Wage and Tax Statement: These forms report the wages a company pays its employees and the taxes and other amounts withheld from those wages. He must file these with the Social Security Administration and provide the employee with a copy of Form W-2 by January 31st after the tax year.
- Form 1099-NEC, Non-Employee Compensation; and Form 1096, Annual Summary and Transmittal of U.S. Information Returns: Form 1099-NEC is similar to a W-2, but applies to independent contractors who are paid more than $600 per year. If necessary, file Form 1099-NEC with the Form 1096 shipping form to the IRS by January 31 and provide copies to non-employees.
- Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return: Use this form to report the federal unemployment tax (FUTA) your business pays for unemployment compensation.
- Form 1095-C, Employer-Provided Health Insurance Offers and Coverage. and Return Form 1094-C, Letter of Transmittal for Employer-Provided Health Insurance Offers and Coverage Information: These forms list which employees are covered and help determine tax credit eligibility. If required, please provide the 2023 Form 1095-C to the employee by March 1, 2024. File Form 1094-C by April 1, 2024.
- Form 1099-MISC, Miscellaneous Income; and Form 1096, Annual Summary of U.S. Information and Return of Transmittal: Submit these forms to the IRS to report income such as rent or royalties. The deadline for filing these forms is February 28th (or March 31st if filing electronically).
- Form 8027, Employer Annual Information Tip Income and Return of Allocated Tips: If you need to complete a 2023 annual report for food and beverage receipts and tips reported by employees, you have until February 29, 2024 (March 31 if submitted electronically) Please submit this form to.
Depending on your business and its location, you may also be required to file other federal, state, and local tax returns.
