5 Steps to Prepare Your Business Finances for Tax Season
Preparing your business for tax season requires careful attention to detail, timely action, and the right tools and resources. My guide walks you through five steps to ensure your business is ready for tax time.
Step 1: Start Early with a Tax Season Preparation Timeline
Establish a timeline. Mark your calendar. Set to-dos. Starting early gives you the time to gather and review all necessary documentation, correct any errors, and make decisions that can impact your tax liabilities.
Here’s a calendar to help keep you on track (fiscal year of January 1 – December 31):
September - October:
Review and Organize Financial Records: Review your financial statements to ensure that all income, expenses, and deductions are accurately recorded.
Tools to use: QuickBooks or Xero
Update Accounting Software: If you use accounting software, ensure it is updated with the latest features for tax compliance.
Separate Personal and Business Expenses: Double-check that all transactions related to your business are separated from personal ones.
November - December:
Estimate Tax Payments: Calculate your estimated taxes and make quarterly payments if necessary. This helps prevent any surprises during tax season.
Review Deductions and Credits: Research potential tax deductions and credits you might qualify for, including business expenses like travel, equipment, and office supplies.
Resource: Common Business Deductions
January:
Collect and Prepare Forms:
W-2 Forms: If you have employees, you must send out W-2 forms by January 31.
1099 Forms: If you've paid contractors $600 or more, you must issue 1099 forms by January 31.
Guide on issuing 1099s and W-2s: IRS Guide on Forms W-2 and 1099
Reconcile Bank Accounts: Make sure your bank and credit card accounts are reconciled for accurate reporting.
February:
Organize Receipts and Invoices: Ensure all business receipts, invoices, and expense reports are correctly categorized.
Tool: Shoeboxed (for organizing receipts)
Hire a Tax Professional: If your finances are complex, now (or earlier) is the time to seek guidance from a tax professional.
March - April:
Review Final Reports: Before filing, review the profit and loss statements, balance sheets, and other financial documents.
File Taxes Before the Deadline: Ensure you file your taxes before April 15 to avoid penalties.
Tool: IRS E-File
Step 2: Organize Your Financial Records
Being organized is crucial to ensuring that tax season goes smoothly. Here's how to do it:
1. Use a Cloud-Based Accounting System
Switch to a cloud-based accounting system like QuickBooks or Xero. These platforms can help automate data entry, track expenses, and generate reports, ensuring your records are updated in real-time. Using these systems will save time when you need to pull together financial data during tax preparation.
2. Track Income and Expenses Consistently
Consistently tracking your income and expenses throughout the year makes tax time much more manageable. Ensure all revenue streams are accounted for and that expenses are correctly categorized.
3. Keep Detailed Records of Deductions
Save receipts, invoices, and proof of payments for any deductible expenses. Standard deductions include travel, equipment, software subscriptions, and employee benefits. You can organize these documents digitally using tools like Expensify. Here’s that list again: Common Business Deductions.
Step 3: Stay Informed on Tax Law Changes
Tax laws frequently change, and staying informed will help you take advantage of new deductions and avoid potential penalties. Subscribe to tax newsletters or work with a tax advisor to stay current on any changes that might impact your business.
Step 4: File Tax Forms Accurately and On Time
Filing the correct forms by their due dates is essential. Here’s a summary of key forms and deadlines:
Form 1099-NEC: Report payments made to contractors by January 31.
Form W-2: Send to employees and the Social Security Administration by January 31.
Form 1040 (Schedule C) or 1120 (C-Corp) or 1065 (Partnership): File your business tax returns by April 15.
For additional guidance on which forms apply to your business structure, visit IRS Form Guidance.
Step 5: Consult with a Tax Professional
Even if your business’s finances aren’t complex, consulting with a tax professional is wise. They can provide insights into tax-saving strategies and help ensure compliance with tax laws.
Staying organized and following a structured timeline can reduce stress and avoid last-minute scrambling when preparing your business finances for tax season. This guide is your roadmap - remember to use the many tools and resources to make the process smoother.
For more resources, explore:
*** My guides, including the PDFs, are for reference only. I am not a tax professional. Please work with your CPA to determine your business's requirements. ***
