As soon as the clock strikes midnight on New Year’s Eve, the countdown begins for thousands of small businesses to file their W-2’s, 1099s, and ultimately their State and Federal Income Tax Returns. More often than not, taxes are an afterthought to the daily requirements of running a business and tax time is a frantic stretch of weeks gathering documents and answering dozens of seemingly unrelated questions.
What can you, a small business owner, do in advance of this hectic time? What can you do to reduce the cost and headache of filing your taxes?
Here are four things you should do before even handing your documents over:
Yes, I mean that pesky long letter your tax accountant sends out every Fall. It never gets shorter. Some years it’s as thick as a book. Besides describing the legalities and limitations of the work to be done, this long letter often lists the information an accountant needs in order to properly file your return. It’s like an instruction manual, laying out the pieces required to put a puzzle together and telling you how it’s to be constructed.
If you provide your accountant with all the necessary pieces of the puzzle (your business and financial information) the puzzle (your return) will be solved quickly and without mishap. Read the letter and learn what is expected of you. Carefully gather the information yourself. Don’t pawn it off to your employee who doesn’t know squat about your business’s financials.
Tax professionals are not auditors. They prepare tax returns based solely on the information business owners provide. Make sure you prepare accurate and understandable records. Don’t provide a copy of your books with negative liabilities or cash balances you know are wrong. This will cost you more in the end because your accountant will have to take more time to clean up any messy bookkeeping. If you don’t know how to correct an accounting error but are aware of its existence, let your accountant know so they can address it quickly.
You can never provide too much documentation. If you purchased equipment or property, provide the receipts or the financing agreement. Also, provide an adequate description of what you bought. If you closed a loan, provide the closing documents and determine your outstanding balance was as of 12/31/2019. Be sure to separate your payments between principal and interest, otherwise, you will miss out on a deduction. Here at Bankable, we are often called upon to give this information and are more than happy to provide it.
If you were required to issue 1099’s, provide your copies for confirmation and reference.
Gather these documents as you make the transactions and store them in one folder. When tax time rolls around, you won’t have to wait until your accountant asks for them. Instead, show your accountant up and save some billable hours by delivering the support in advance.
Your tax accountant is not all-knowing. They only know what you tell them this year and what you told them last year. Your return will be prepared in the same manner as last year unless you inform your accountant otherwise. Perhaps you added partners to your business this year or started a new line of products. These events could require significant changes to your return. For example, if you were a sole proprietor and then added a partner, this would necessitate an entirely different tax return!
Make a list of all the important changes and trends in your business and industry before meeting your accountant. Things that could appear trivial might have a noticeable impact on your return and ultimately your tax bill.
Be preemptive in explaining variations in your profit and loss statement and balance sheet from last year’s numbers. If your inventory is larger than last year’s inventory, write a note explaining the reason why this happened. This alerts your accountant to the fact your COGS may be lower than last year and prevents your accountant from having to call or email about the change. Other changes worth telling your accountant in advance include:
Accountants often bill for every six minutes they spend working on your return. How much time does it take to write an email? At least six minutes. This means every email or call they make to you is being added up and charged. Do a favor for both you and your accountant: prepare in advance.
News flash: April 15 comes around every year. As a small business owner, you can read your accountant’s engagement letter and organizer, clear up your books, periodically gather documentation, and keep notes on key changes before taxes are due. Every year. If you do these four things, you will feel ready to meet the demands of your accountant and will ultimately save on preparation fees and even taxes.
This is how you make tax time a breeze. If you would like further assistance with your taxes, please email us email@example.com. We would love to help.
Written by: Danielle Deal
If you would like some more sources on how to be best prepared for tax season, here are just a few:
Bankable is a nonprofit organization that is focused on the economic development of Indiana communities through the creation, growth, and sustainability of jobs through small businesses. This is done by equipping under-served small businesses with capital solutions, business development resources, and meaningful mentorship so they can become bankable. Started in 2010, Bankable is a certified SBA microlender, SBA Community Advantage Lender, and a CDFI.