Fall is an ideal time to evaluate your current tax situation. Instead of putting off your tax-related concerns and responsibilities until December or January, doing the prep work now may help you reduce your tax bill for the current year and avoid potential issues when it’s time to file your business taxes.
Here are four things every small business owner can do this fall to get ready for tax season:
1 – Get Organized
It may seem like you have plenty of time, but 2020 is just around the corner. Get a jump on your tax prep by creating a process to help you pull together all of the necessary documentation and avoid scrambling at the last minute.
Update your bookkeeping records and file tax related documents and other relevant information in one place. Organize invoices for often overlooked items including cloud-based subscription services like Dropbox, domain names and web hosting, and online shopping services such as Amazon or Costco. Don’t forget to gather receipts for paid professional services, membership dues, or business-related publications, as well as for expenses incurred at industry conferences or trade shows you attended this year.
When it comes to your business taxes, omissions or mistakes in even the smallest details can cost you time and money. To make sure your business is tax-ready, create a checklist of important action items. This can include filing payroll forms, issuing 1099 forms, and assembling income and expense records.
Be sure your list includes a review of your business insurance coverage. Having the right type and amount of insurance to protect your organization and employees is essential, and it’s likely that your business needs will change over time. Reviewing your policy annually will allow you to update it as needed to ensure that your coverage continues to fully protect your assets in the year ahead.
2 – Know Your Deductions
There are numerous potential tax write-offs for small business owners. The short list of possible deductions includes:
- Home office expenses
- Startup costs
- Office supplies, furniture, and equipment
- Computer software and subscriptions
- Telephones (including cell phones if used for business)
- Business travel expenses
- Retirement contributions
- Applicable insurance premiums
However, it’s important to keep in mind that the Tax Cuts and Jobs Act (TCJA) passed in December 2017 made sweeping changes to the income tax laws, including limiting or eliminating deductions for certain expenses. For example, businesses can only deduct 50 percent of the cost of most meal expenses, and tax reform completely eliminated any deduction for entertainment expenses starting in 2018. This means that while you or your managers may be able to deduct half the cost of a meal where you are conducting business with a client, you can no longer deduct the cost of treating that client to a concert or football game.
Now is the time to check with the IRS or your tax professional to ensure you are accessing the most up-to-date tax law information when determining your eligible write-offs.
3 – Maximize Deductions
Do not hesitate to spend money on your business to maximize deductions. If you can afford to pre-pay expenses that can be deducted from your business income, consider doing so now. Make vendor or advertising payments in advance, lease a vehicle, stock up on office supplies, or give your employees their year-end bonuses before December 31st. You can also minimize your tax burden by donating cash, property, or equipment to a qualified charitable organization.
If you have been thinking about purchasing or upgrading your equipment, it may be to your advantage to do so before the end of the year. Some business equipment falls under Section 179 of the Internal Revenue Code, which allows business owners to deduct capital assets immediately rather than depreciate them over several tax years. Section 179 can be a big advantage to your small business, allowing you to reduce your taxes by a larger amount this year instead of waiting to get the full tax benefits of buying new equipment. This 2019 Section 179 Calculator will show you how much this could save your small business.
4 – Defer Income
Every small business shares the goal of increasing revenue month over month. However, as you get closer to the end of your business tax year, planning ways to defer income to after January 1st is a strategy that can reduce your tax bill and potentially save you a significant amount of money.
For example, if you will have a loss this year but expect to turn a profit next year, you may want to encourage customers to pay you this year when your profits will be lower. If you think your profit will be lower next year, try to move payments from customers into next year to reduce the income you report for this year. This can be risky, since you can’t be sure what will happen next year, but the potential savings makes it worth a discussion with your tax adviser.
Small business owners would be wise to consider tax planning a year-round activity rather than a once-a-year event. Waiting until the last minute makes tax preparation more complicated, and often limits your money-saving options. Preparing now can put your mind at ease and allow you to focus on what matters most – growing your business.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.
Summit does not provide tax, legal, or accounting advice. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.