Managing a business is already difficult enough, the burden of filing taxes every year makes it worse. Working with your accountant all year round, rather than just while preparing your tax return, is very important.
Making decisions regarding your finances without contacting an accountant or financial expert can put you at risk and ultimately cost you more money.
Tax Accounting For Small Businesses
The importance of tax accounting for small business cannot be overemphasized because no business owner wants his or her company shut down by government authorities for not paying the correct tax.
To help your business sail through the challenges that accompany the tax season, here are nine best practices for tax accounting for small businesses.
1. Hire the right small business accountant
Your accountant is an important part of your company. They should offer services beyond financial statement preparation and tax preparation. If that's all they offer, they're not the ideal accountant for small businesses.
Throughout the year, your accountant should collaborate with you to manage income and expenses, ensure that you don't have a cash flow problem, and keep an eye on your gross and net profits.
Work with your accountant always, from the beginning of your firm, not only during the tax season in March and April. The majority of small businesses do not realize how important tax accounting is to their survival and growth.
2. Make a claim for all income that has been reported to the IRS
The IRS receives a copy of your 1099-MISC forms so they can compare what you've reported to what they know you've received. Make sure the amount of income you submit to the IRS is the same as the amount shown on your 1099s. The IRS will flag you if you do not comply. You must record income even if a customer does not provide a 1099. For state taxes, the same rules apply.
3. Keep accurate records
Maintaining detailed and accurate records all through the year can ensure the accuracy of your tax return. If you don't keep accurate records, you could be missing out on deductions or, worse, putting yourself in danger of an audit.
Every business owner should buy tax accounting software for small businesses since it is user-friendly, affordable, and helps in keeping track of all of your income and expenditures.
4. Keep your personal and business expenses separate
If the IRS audits your company and discovers personal and business expenses are mixed, irrespective of whether you correctly reported business expenses, the IRS may begin looking into your personal accounts. Always open a separate bank account and credit card for your business, which will not be used for personal transactions.
5. Know the difference between net profit and gross profit
If you spend more money on producing a particular product than you sell it, no matter the number of units you sell, you will lose money. Small business owners frequently overlook the difference between net and gross profit.
Gross profit is the profit before expenses are deducted, while net profit is the profit after expenses have been deducted. The net profit is the real profit.
For example, if your product costs $1000 to produce and sells for $1500, your gross profit after sales is $500. However, your net profit could be as little as $100 after deducting expenses.
It's crucial to understand your gross and net profits in order to increase profitability and expansion.
6. Classify your business correctly
Failure to properly classify your business under the category it belongs to could result in you paying too much in taxes.
Your taxes will be affected differently depending on whether you categorize your business as a Sole Proprietorship, C Corporation, S Corporation, Limited Liability Partnership, Limited Liability Company, or Single Member LLC.
Small businesses should speak with an attorney and an accountant to know how to classify their business.
7. Manage payroll
Hire a small business accounting firm that specializes in payroll management, but ensure that they are reputable. Some business owners would employ a less-known payroll service to save money, only to discover later that the agency was not remitting payroll taxes on their behalf.
If this occurs, the business owners will be responsible for the payroll taxes. Every quarter, the IRS checks to determine if businesses have paid payroll taxes.
8. Consult your accountant about your business plan
A qualified accountant can advise you on how to expand your company. Seek their guidance on how much to put into your retirement account and if you should accept a bonus or wait a year.
Your accountant can determine whether buying rather than renting a small place for your business will save you money.
9. Use capitalization rules to your advantage
You may be able to deduct a considerable amount if you purchase tangible property for your company. Ensure that your accountant is familiar with capitalization rules.
Small business tax accounting is done by keeping meticulous records of all income and expenditure, and extracting financial data from business activities. If you are not well informed about your business records and tax filing, you can as well outsource your tax accounting to a reputable accounting firm near you.