Taxes may not be the primary issue on the minds of business owners at this time of the year, but they perhaps should be. Essentially taxes are the difference between what you earn and what you keep. Some simple actions at the start of the year can lead to tax savings for the entire year.
1. Get your accounting system straight.
Start keeping your books and records for the year. You probably have a method for accounting purposes (e.g., QuickBooks), but make sure you have a business practice for regularly imputing your income and expenses, and reconciling your bank and credit card statements.
- Who will handle this task? You, a bookkeeper on your staff, an outside QuickBooks pro, a CPA?
- How often will you update your books? Daily, weekly, or at some other interval?
2. Set recordkeeping practices.
You must substantiate expenses in order to write them off. Certain types of expenses need special documentation:
- Travel and entertainment costs: Receipts and a statement of the date, reason, and other factors concerning the expense. With the exception of lodging, you don't need receipts of expenses of less than $75.
- Vehicles: To deduct business use of a personal vehicle, you need a log of business driving.
- Charitable contributions: You must have an acknowledgment from the charity for any donation of $250 or more.
Documentation can be done with a written record or by using an app for this purpose (there are many, some of which are free).
3. Set aside funds for taxes.
The biggest challenge for many small business owners is having the cash on hand to pay taxes when they're due. Cash flow challenges often make owners spend the funds that should be set aside for taxes. Create a separate account to segregate tax funds and use cash flow management to prevent you from raiding this account for non-tax purposes.
4. Work regularly with a tax professional.
While most small businesses use paid preparers for their tax returns, many don't work closely with tax professionals throughout the year. This is a mistake. The savings that can result from professional advice may well exceed the cost of such advice.
5. Keep up to date.
This year may see dramatic tax reform that could impact your business. The sooner you learn what changes are coming, the quicker you can take action for tax savings. Stay up to date by asking your tax professional to update you, or by reading resources such as Big Ideas for Small Business[R] and Idea of the Day[R], which report on new developments.
Include paying attention to taxes in your New Years' resolutions.