The year 2020 is rapidly approaching. While you’re contemplating your New Year’s resolutions, consider making one of them preparing your taxes before the end of the year. Doesn’t sound very fun, but it is necessary.
Organizing your business files before the year’s end makes tax season way less daunting. This is the time to make sure your finances are current so that you can begin the new year on the right foot.
Here are steps to help prepare your business for the end of the year.
Organize your bookkeeping
Go through all your files to verify your numbers add up correctly. Keeping your books organized throughout the year will make checking your records much more convenient, and enjoyable, as you’re seeing everything line up.
If you haven’t gotten to the place where your bookkeeping is in an organized condition, it’s not too late to consider getting your files in order in a remote fashion. One such service provider that can help you take care of your bookkeeping all year long and assist you during tax season is Bench.
Reevaluate your transaction categories
This is the time to ensure that all your transactions you’ve recorded for the year are categorized properly. Incorrectly categorizing a transaction could affect everything you’ve done throughout the year, coming back to haunt you when it comes time to file.
For example, if you’ve been accidentally categorizing credit card processing fees for your business as part of your overhead, you may find yourself with a fluctuating monthly overhead expense. This can throw off financial projections for the new year It’s imperative to fix the problem immediately to avoid discrepancies once the books are closed.
Balance your books
It’s necessary for your credits and debits to align if you use the double entry method of bookkeeping. Otherwise, some accounts may reflect less value.
Simply make sure you’ve recorded a debit once you’ve credited an account with that same amount, and vice versa, while you’re double checking your transaction categories.
Reconcile your bank accounts
Reconciling your bank accounts ensures your bank statements match up with your records, reflecting the tangible cash you’re actually working with.
Seek an expert’s opinion
Small business owners who are attempting to file their organization’s taxes for the first time should enlist the help of a CPA. They can corroborate your books and see if everything adds up correctly, so you can file your taxes accurately. Moreover, they might find any overlooked tax deductions, saving your business even more money for the new year.
Closing the books on the year
Close your books on December 31. Accumulate all your numbers for the year, ensuring everything is balanced, and preparing year-end financial statements for filing your tax return.
If you sought the assistance of a bookkeeper, they’ll close the books for you in addition to verifying transaction categories and balancing the books.
Support your itemized deductions with careful proof
Be sure to substantiate any itemized deductions you’re claiming on your tax return with proper documentation. If you’re ever audited, you’ll need those receipts to support your claims to avoid getting penalized by the IRS if they find your deductions to be invalid
The following documents should be held on to for reporting deductions:
Save your receipts
Add the following to every receipt you keep:
A business meal that’s being written off should include who attended the meal, and business-related topics discussed.
Digitize your expense records
The most sustainable and efficient way to keep track of your expense records is by going paperless. You’d be surprised how much clutter you’ll eliminate and how much easier it is to retrieve a receipt that you cannot seem to locate.
Expensify is a very versatile app that enables users to photograph and categorize their receipts, upload them to the cloud and organize them by type.
Prepare to owe the IRS
Everyone hopes for a nice tax refund, but it doesn’t always turn out that way. Being a responsible business owner means being prepared to owe Uncle Sam, so setting aside some money for when it comes time to file will soften the blow a little.
Be familiar with the 30% rule
On average, businesses pay about 30% of their gross income to the IRS for taxes. If you’re backdating your finances for the year,put aside 30%.
Knowing this ahead of time will help you be better prepared for the following year. Just set some money aside each month to create a cushion for what you’ll owe come tax season.
Set aside taxes ahead of schedule
You can set aside taxes as you earn income in 3 ways: Per-payment, monthly, and yearly.
Per-payment is conducive when invoicing clients. When they pay, set aside 30% for taxes.
Monthly works when you process a lot of transactions every month.This helps those who have an ecommerce business. Just set aside 30% of your gross income.
The yearly approach is good for small businesses when income is processed on a more sporadic basis and you’re not expected to make quarterly payments. Use this time to build a solid foundation for your business to ensure income levels grow, then you can start establishing good saving habits as conditions improve.
Create a separate account
Whatever you do, do not rely on your savings to get you out of a jam, this can cause you to dip into the red by year’s end. Create an account apart from savings where you can store your 30%, this way, you’ll always know how much you have saved up in preparation for tax time.
Stay on top of tax reforms
It’s important to stay informed on changes the IRS makes to tax laws every year. As daunting as that sounds, a business owner needs to be aware of amendments made to what now constitutes a tax deduction or which deadlines have been modified for filing certain forms.
In an effort to keep abreast on tax reforms, the IRS releases Publication 5318 every year. It divulges which changes to tax laws businesses can anticipate in the coming year. Bookmark it for your reference.
If you hired a CPA to file your taxes, then it’s their job to notify you when tax laws change and you’re not being compliant.
If you depend on Bench to do your bookkeeping, you can employ BenchTax, which helps bookkeepers work one-on-one with tax professionals to file your taxes and ensure 100% compliance with the current year’s tax laws.
BenchTax prevents you from having to bring your books to a CPA, and explain the ins and outs of your business. Your Bench team already produces all your financial statements throughout the year, and is vastly familiar with your expenses so they can collaborate with tax professionals to guarantee your return is prepared accurately.
Start the new year strong
Every new year is a new opportunity for a fresh start to run your business more efficiently, leaving the previous year’s mistakes in the past. Start your new year off right with these simple steps:
Internally auditing your business helps you look more closely at your accounting processes and operations, and making sure everything is up to speed.
Assess how to improve your process for recording transactions on your books, how you store your business records, and your invoicing cycle.
Build financial reports
By the end of January, aim to have an income statement, cash flow statement, and balance sheet ready for the month. You’ll also want to do this every month for the rest of the year to ensure your financial reports are as accurate as possible.
Gathering all your financial reports on a monthly basis will help you make intelligent business plans when it comes to investing and lowering expenses.
Forecast your finances
Project your finances’ future performance by gauging their behavior from the past, further preparing your business for the unexpected such as a recession.
You can always go back and reference your financial forecast once it’s been established to help you make better business decisions. It may influence your business hours or how big of a loan you can take out for an expansion.
Check out Bench’s guide to financial forecasting so you can start creating your own forecasts.
To learn more about how Bench can help you organize your finances and get ready for tax season, check out their website.