Posted by Debi G Hill, CPA

Best Tax Practices For Small Businesses

Best Tax Practices For Small Businesses

Running a business is quite tricky without increasing the complexity of filing taxes every year. The key, experts say, is to work with your financial advisor or an accountant throughout the year, not just to prepare your tax return. Making business decisions without consulting an accountant or financial advisor can put you in danger and cost you more in the long run.

Here are some of the best practices for small businesses when it comes to tax preparation and small business accounting and working with an accountant or financial advisor.

Hire the right accountant

Your accountant must do more than prepare financial statements and taxes. Your accountant should work with you throughout the year to track your income and expenses, to make sure you have no problems with your cash flow, and to monitor your gross and net profit. Work with your accountant from the first day of business opening, not only in March and April, for the tax season. Most small businesses don't understand the importance of considering the survival and growth of their business.

Claim all income declared to the IRS

The IRS receives a copy of the 1099-MISC forms it receives so that it can match the reported income with what they know they have received. Make sure the income you report to the IRS matches the amount of income you reported in 1099 that you received. Failure to do so is a red flag for the IRS. Even if a customer does not send 1099, they still have to report this income. The same rules apply to state taxes.

Keep proper records

Keeping complete and accurate records throughout the year will ensure that the tax return is correct. Keeping inappropriate records could leave deductions on the table or, worse, risk being revised. It is recommended that all businesses invest in a basic version of the accounting software because it is easy to use, inexpensive, and tracks all of their income and expenses.

Separate business from personal expenses

If the IRS monitors your business and detects personal expenses mixed with business expenses, whether or not you have correctly declared business expenses, the IRS may start examining your accounts due to the combined money. You always get a separate bank account and credit card for your business, and you only incur business expenses for those accounts.

Understand the difference between net income and gross profit

If your product costs more than what you charge, you will lose money regardless of the number of units sold. Small business owners often forget to consider the difference between their net income and their gross income.

For example, if it costs $ 150 to make your product and sell it for $ 200, your gross income is $50. But, after deducting your expenses, your net income could drop to $20. It is essential to know what your gross and net profits are. So you can be more profitable and grow your business.

Assess your business properly

If you don't rank your business correctly, you can pay excess commissions. The decision to classify your business as Company C, Company S, Limited Company, Limited Company, LLC, or Sole Proprietor will have a different effect on your taxes. It is essential that small businesses consult a lawyer and an accountant to determine how they classify their business.

Manage payroll

Hiring a company to help pay with managing your payroll, but make sure the company has a good reputation. To save money, some entrepreneurs use a lesser-known payroll service, only to find out later that the service did not send corporate taxes. If that happens, entrepreneurs depend on payroll taxes. The IRS usually checks quarterly to see if payroll taxes have been paid.

Ask your accountant for advice on the business plan

A good accountant gives you advice on how to grow your business. Ask him/her for information on how much to pay into your pension fund and whether you should receive a premium or defer it for a year. Your accountant can tell you if buying a small space for your store or business instead of renting it can save you money.

Take advantage of the recovery rules

If you purchase tangible assets for your business, you can make a significant deduction. Make sure your accountant understands the funding rules.

Debi G Hill, CPA
Contact This Member