Get Even More Visitors To Your Blog, Upgrade To A Business Listing >>

How to Prep Your Business Before Tax Season

Doing Business taxes can be difficult for new entrepreneurs. In this article, I’ll share smarter and faster ways to record your expenses and keep track of your receipts and other important documents for your taxes. Each of these tips is easy to implement and should help make tax time a breeze!

Tip #1: Use accounting software to keep track of business expenses

One of the things that many small business owners struggle with is staying on top of their bookkeeping throughout the year. If you don’t use an accounting software like QuickBooks or Xero, you are setting yourself up for failure come tax time.

I’m a CPA and believe it or not, I use QuickBooks to do my books and prep myself for tax season. This makes it so much easier and ensures that you keep accurate records of your income and expenses. If you find yourself always in “catch-up” mode when it comes to your books, then you must invest in Accounting Software.

Tip #2: Use expense categories in your accounting software

Expense categories are just a way to group purchases that you make for your business. For example, office supplies, restaurants, and gasoline are expense categories. They can help you better track vendor expenses rather than setting up each and every vendor for everyday purchases.

The reason is that it will allow you to enter expenses faster. This will save you time and it will allow you to only keep track of the most important info required for tax purposes.

Let’s walk through a scenario to see how this would work:

As a business owner, you probably purchase office supplies for your business. Hopefully, you’re not like a kid in a candy store eyeing all the shiny new pens and notebooks on the shelves. More than likely, you will purchase only needed office supplies from an office supply store like Office Depot or Staples, but you may also purchase office supplies from other places like Costco or Target.

When you are ready to record these purchases in your accounting software, set it up like this:

  • Don’t create four vendors in QuickBooks (or your QuickBooks alternative) for Office Depot, Staples, Costco, and Target.
  • Do set up one vendor called “office supply purchases” or “office supplies” and code all office supply purchases to the “office supply” vendor.

In the table below, I’ve included some examples of everyday purchases that you can set up categories for instead of vendors.

Most business owners don’t need to keep track of how much money they spend with each vendor that they purchase everyday items from like office supplies, gasoline, and client lunches. Believe it or not, the IRS does not require that you track your expenses like this either.

In addition, the key financial statements that you use to determine the health of your business like the profit and loss statement will list expenses categories like “office supplies” and not the specific vendors you purchased; this is another reason why you don’t need to track your expense by vendor.

I’m an adjunct accounting instructor and I also teach QuickBooks. As I was explaining this concept in one of my classes, a hand immediately shot up. At first, I thought the student was going to try and challenge me on whether or not the IRS actually requires you to track your expense in this manner—can you tell that this happens often?

However, the student turned out to be the franchise owner of a local H&R Block office. He supported my claim 100 percent. He told the class that in preparing tax returns for business owners, he often shares tips like this one. He went on to say that at the end of the day if the IRS wants that level of detail, you can always produce the receipt.

Luckily, I have a great solution for you that gets rid of the receipts that you have stuffed in the glovebox of your car and that beloved shoebox, so keep reading!

Tip #3: Use annual business credit card summaries

First, every small business owner should set up a separate business checking account (that is never used for personal expenses) so that you can easily identify income and expenses that are reportable and/or deductible for tax purposes.

If you don’t do this, it will make it difficult to keep track of legitimate business expenses that may be eligible for tax deductions versus personal expenses, which are not.

If you have both business and personal expenses in the same bank account, you will need to go through your bank statements and only include the expenses related to your business in your accounting software. This manual process of separating out personal and business expenses is so tedious that I promise you’ll be ready to run to the nearest bank to set up that business account to avoid going through this next tax year!

Before you know it, April 15 will be here. If tax time creeps up on you every year, check out these four tax planning tips every small business should implement. However, if you happen to find yourself behind with entering your expenses into your accounting software, one way to get those expenses entered into quickly is to use the annual summary that credit card companies provide in early January.

This report is great because it summarizes all of your purchases by expense category. You can use these numbers to sum your total expenses for each category. Below is a snapshot of what it will generally look like.

As you’ll see, most of the categories will be similar to what you already have set up in your accounting software:

One drawback to using a summarized statement like this one is that you won’t be able to enter the exact date of each purchase. In the grand scheme of things, this is minor, but it’s not something that you should make a habit of. Remember, this is a short-term solution so that you can get your expenses recorded, generate financial statements, and file those taxes on time! If you purchase fixed assets during the year, it is important to have the specific purchase date because it is a key component in calculating depreciation expense which is deductible for tax purposes.

Tip #4: Go paperless

I’ll be the first to admit that the concept of “paperless” always sounded good but was hard for me to embrace—at first. As an accountant, I’m a big proponent of documentation. As they say on my favorite legal drama, Law & Order, “it’s about what you can prove.” That seems to be the IRS’s motto as well.

With today’s technology, it’s a lot easier to create electronic copies of receipts and other financial documents that you used to have to store away in a physical filing cabinet. It’s time to get rid of those dusty filing cabinets that are taking up space and migrate to an electronic filing system. It is much easier to locate documents that are stored on your computer (or in the cloud) than it is to shuffle through file folders.

But, how do you organize all of these files? Well, you ask great questions. I recommend that you use an online cloud storage system like Dropbox. You can create a folder for the year (2017) and then a subfolder for each expense category (i.e. Office Supplies, Meals, Fuel). Download the app onto your mobile device so that while you are out and about you can easily scan receipts, save them to the right folder and toss that paper receipt! No more stuffing receipts in your glove box or wallet to deal with later.

If you’re not convinced, you can take baby steps by starting in one area, but I promise that once you implement the “paperless” concept, you won’t be able to get rid of those filing cabinets fast enough. Below, find some strategies that you can implement to move towards the “paperless” model:

Scan receipts

Discarding receipts is one of the most common mistakes made by small businesses. Don’t miss out on a tax deduction because you got rid of the receipt. There are several apps on the market that will allow you to scan receipts. Neat and Shoeboxed are both great apps that will integrate with an accounting software like QuickBooks or Xero so that you can eliminate data entry altogether!

Download bills from vendors

Nowadays, most vendors will offer you the option to receive your bills by email or allow you to download them directly from their website. I recommend that you stop having your bills physically mailed to you and start downloading your bills instead. This will allow you to save time by not having to scan it first; you can easily save the bill in your electronic folder or upload it to your accounting software in just a couple of minutes.

Bonus—if you use Xero, they have a cool feature called side by side files. This allows you to upload your supplier bills to the software so that you can have the info right in front of you when you are ready to write that check.

Get PDF receipts

Nowadays, more retailers are moving away from paper receipts and offering you the option to receive text or an email with your receipt attached. I recommend that you go with the emailed receipt because it is usually a downloadable PDF document whereas the text message receipt may not be. You can easily drag and drop a PDF receipt into an electronic folder in less than a minute.

Download all bank or credit card statements

For most of you that do online banking like myself, this one is probably a no-brainer. However, if you are still receiving paper bank or card statements, you should cut the cord asap. This is one of those areas where you can minimize your chances of identity theft.

Believe it or not, there are people out there who steal people’s identity simply by opening up their mail. I no longer receive any documents with financial information like bank or credit card statements or 401k or other investment information via snail mail.

The bottom line

Believe it or not, tax time can actually be a breeze. The key to reaching that goal is to set up a system that will work for you and stick to it. To get started, set aside a couple of hours during the first week of each month to make sure you have scanned and filed all receipts and bills for the previous month. At the same time, complete the reconciliation process in your accounting software for all bank or credit card accounts to ensure that your bank or credit card balances and your books match.

Be sure to put this on your calendar as a recurring “meeting with your books.” Try and pick a generally a light workday and one that you tend to be in a fairly good mood, (i.e. a Friday or Saturday morning). If you are willing to do the work throughout the year, the mad dash to April 15 will become a thing of the past.

For more on being prepared for tax seasons, be sure to check out 4 Things Every Small Business Should Know About Taxes.



This post first appeared on Business Plan Software And Sales And Marketing Sof, please read the originial post: here

Share the post

How to Prep Your Business Before Tax Season

×

Subscribe to Business Plan Software And Sales And Marketing Sof

Get updates delivered right to your inbox!

Thank you for your subscription

×