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We’re sure we don’t have to remind you… but in case you’ve been willfully ignoring it, Tax Day is almost here. You’re getting down to the wire to file your business taxes, and your tax professional has likely been hounding you to get your books into shape. (Yes, you say. I know, you say.)
If you’ve been procrastinating about your business taxes, it’s seriously time to buckle down and get to work. Follow these must-know tips to make sure your books are ready so you hit the tax deadline and don’t get slapped with any fees for filing late.
Check off everything on this list and you’ll be able to breathe a sigh of relief, and then get back to running your business. Plus, you know, your accountant will stop banging down your door. It’s a win-win for everyone.
The IRS requires that taxpayers report all of their income and expenses on their tax return each year. Excluding income can result in costly penalties and interest, or in extreme cases, criminal prosecution. Excluding expenses will result in, well, paying more tax.
And nobody wants to do that!
The best way to make sure that you’ve accounted for all of your income and expenses is to organize your financial data using accounting software like QuickBooks Online. The beauty of most cloud-based accounting software is that they connect to your business bank accounts and business credit card records and import them automatically, which reduces the likelihood that you’ll miss something. An added benefit of accounting software provides you insights into your revenue sources, spending habits, profitability, and growth patterns.
Reconciling your accounts to the bank is the only way to know that your books are truly complete. Most accounting software includes a tool to help you complete this process, and some (like QuickBooks Online, since we’re already chatting about it) even do it for you automatically.
It’s easy to identify transactions you’ve made in your business when they’ve been paid using a business checking account or credit card account. But things can get complicated when you pay or get paid in other ways.
Lots of businesses make purchases or receive payment without an exchange of cash. Lots of accountants (present company included) often see clients underreport their income and miss out on deductions because they’ve paid for expenses using small business loans, cryptocurrency, or even bartering. Make sure that you’ve recorded these types of transactions on your books, too! If you’re not sure how to log them, find a qualified bookkeeper or certified public accountant to help you make the entries.
Another non-cash transaction many small business owners forget about is mileage expense. Mileage can be a big deduction for your business. The IRS-prescribed mileage rate in 2017 was 53.5 cents per mile, and this can add up quickly (1,000 deductible miles will get you a $535 deduction).
To deduct mileage, you must keep a detailed mileage log that includes actual miles driven and their business purpose. There are apps out there to help you keep track of your mileage and can even track your drives automatically using the GPS feature on your phone. We recommend QuickBooks Self-Employed or MileIQ.
Another important thing you’ll need to address to make sure your books are in good shape is organizing your receipts. The IRS requires that businesses keep adequate accounting records including supporting documentation. Here’s a list of the types of documents you should keep by category, according to the IRS website.
Money received from customers:
Amounts paid for items you sell or expenses you incurred:
Remember that special rules apply to travel, transportation, meals, entertainment, and gifts, so keep that in mind as you’re getting everything together.
Purchases of machinery or equipment (greater than $2,500):
There are lots of apps you can use to collect and organize your receipts for tax time—try ReceiptBank, Expensify, HubDoc, and Tallie as a starting point.
Many accounting solutions let you attach digital copies of your receipts to transactions via integration from the apps listed above, or by uploading them manually using your computer, phone, or tablet. A huge benefit to using these kinds of apps is that they help to create an “audit-proof” set of books. That’s because the supporting documentation is attached to each transaction. (Boring any other time of year, but sounds dreamy come tax season.) You can bet your accountant will love you for using them!
Every business must report their income and expenses on a cash or accrual basis. And the way you account for each is different.
If your business reports their taxes on a cash basis, then you report income when your customers pay you, and report deductions when you pay for your purchases and expenses. (Hence the name “cash basis.”) Companies using an accrual basis report income in the year you earn it and report deductions when they are incurred (typically the date on the invoice or bill). If you aren’t sure how you report your income, ask your tax pro.
If you report on an accrual basis…
You’ll need to do a little more work to get your books into shape for taxes. You’ll need a listing of all open customer invoices and open vendor bills as of the end of the year.
Once you’ve compiled your list, enter each unpaid item into your accounting software as of the invoice date. If you incurred income or expense in the prior tax year but haven’t billed your customers or received a bill from your vendor, you’ll want to record an entry on your books to reflect the transactions in the correct year. If you aren’t sure how to make these entries, reach out to your tax professional for help. Journal entries can be tricky for non-accountant types!
If you’re reporting on an accrual basis and sell products in your business, you might need to get a physical inventory count and valuation as of the last day of the year. You might have heard that IRS rules for reporting inventory have changed for 2018, but it’s still required for the 2017 tax year.
Preparing your books for tax time doesn’t have to painful. These tips will help you make sure you’re ready to file an accurate return and get the maximum deductions for your business. And, as always, working closely with your accountant will make everything not only easier and clearer—but accurate, too.