Tax season will be upon you soon, dear business owner. That means breaking out the calculator and dealing with endless paperwork for long hours, which isn’t exactly an enviable job.
Whether you run a small business or a conglomerate, the deadline for estimated tax filings in the US is the same. And unless you have a valid reason to tell the IRS, any delay will result in a penalty.
For small businesses or those with limited capital, these penalties can be crippling. For example, for failure to pay taxes by the due date, the IRS can slap a penalty of 0.5% of the unpaid taxes for each month they remain unsettled. It’s worse for failure to file taxes on time, which is 5%. These numbers may seem small but can add up to an untenable amount over time.
Fortunately, thanks to technology and a huge tax preparation industry, crunching tax numbers for the quarter doesn’t have to be a pain. This comprehensive guide will walk small business owners through the financial labyrinth known as small business tax preparation.
Keep copies of receipts
As a customer, you may afford to crumple a receipt and throw it away, especially if the expense isn’t deductible under current tax rules. But for business owners, a receipt is nothing short of a godsend in tax preparation. Accounting professionals agree that keeping track of receipts is one of the—and perhaps the most overlooked—ways to lower a business’s tax obligations.
Regardless of whether or not your state requires businesses to issue them, receipts are the most viable proof of purchase. According to the IRS, along with other pertinent documents, receipts support your purchases and filing for deductions in tax returns. Even if an expense doesn’t come with a receipt, you’ll still need to record it in your books, along with other documentation.
Any receipt is worth keeping for a long time if it provides information about a small business’s sales, purchases, and expenses. Some examples include the following:
- Cash register tape receipts
- Credit card receipts and statements
- Deposit information
- Purchase and sales invoices
- Other proof-of-payment documents
For good measure, keep both paper and digital copies of receipts. The IRS has been accepting digital receipts since the late 1990s, considering printed information doesn’t fade over time like paper ones. Digital receipts benefit small businesses, as they don’t take up as much physical space and are less likely to be lost amid other files.
Receipts that don’t equate to tax deductions can be disposed of, though it’s advisable to keep the more important ones. You never know when they’ll come in handy.
Enlist a tax professional
Getting a professional to do your taxes is on a case-by-case basis. Not all cases warrant investing in a tax pro’s services, but running a small business is one that does. And the reason can’t be any simpler: businesses file and pay more than just income tax.
Estimated tax
As opposed to salaried individuals who have their taxes withheld, business revenues aren’t subject to withholding. As a result, those who expect to owe more than USD$500 in taxes must pay an estimated quarterly tax. Missing a payment leads to a penalty.
Employment tax
A business that manages employees, no matter how many, has to file and pay taxes for the salaries and other labor benefits it provides. These include withholding taxes from salaries, Social Security taxes, Medicare taxes, and Federal Unemployment taxes.
Excise tax
Excise taxes are payments businesses make to the IRS when manufacturing or selling certain goods or services. A business files three excise tax forms by default: Form 720 for quarterly returns, Form 2290 for using heavy vehicles on highways, and Form 8849 for filing refunds. Other forms include Forms 730 and 11-C, mainly for businesses that conduct wagering.
That amounts to loads of paperwork, whether actual paper or e-forms, which is why businesses keep accounting personnel around. But not all can afford to hire one, let alone an entire section or department. Like any other employee, accounting staff are eligible for benefits, adding to the number-crunching you need to do.
As a cost-effective measure, business owners turn to small business tax preparation services for their filing and payment needs. But more than that, these professionals also provide solid advice on any tax breaks and benefits their clients don’t realize they qualify for. Given the complexities of the federal tax code, having someone who knows its ins and outs is a relief.
You can head to the IRS’s RPO Preparer Directory to find recognized tax preparers nationwide. All you need to do is enter the zip code and hit ‘Search.’ This also works when you need to verify your chosen preparer’s credentials.
Consider discussing terms with tax professionals in the off-season. Their services will be in high demand during tax season, meaning you might struggle with getting a spot when you wait until it’s crunch time.
Keep business and personal expenses separate
A steady cash flow is imperative for small businesses to stay afloat, if not thrive. Studies done by both the private and public sectors have pointed to poor cash flow as one of the leading causes of small businesses closing their doors within the first few years.
Unfortunately, many small business owners are still risking their ventures with one ill-advised practice: using personal bank accounts for business purposes. While no federal or state law forbids the practice, some banks and financial institutions have rules against it. Because of this, you can be at risk of being turned down for a business loan, which small businesses really need.
Separating business and personal expenses is crucial for managing a business’s finances, but managing finances extends beyond maintaining adequate cash flow. Come tax season, putting business expenses in their own folder can help simplify tax preparation. That’s less time wasted sorting for business expenses in a pile of bills and receipts.
This separation becomes more important if you want to take advantage of tax breaks provided to certain business classifications. For instance, under the Tax Cuts and Jobs Act, a limited liability company (LLC) can claim up to 20% of its qualified business income in deductions. However, the IRS requires these businesses to set up business checking accounts.
The more streamlined your recordkeeping, the less likely the IRS will scrutinize your deductible expenses. It also translates to a reduced risk of delays in filing and payments.
Set up automated reminders
The human mind is hardwired to forget stuff, at least according to neuroscientists. The science behind it is complex (and irrelevant to this topic), but the IRS won’t accept forgetfulness as an excuse for delays in filing and paying taxes.
That’s what the reminder function in most mobile devices is for. Set up reminders of tax filing and payment deadlines on your phone or computer so you don’t completely forget them. There are a few dates you need to set up for.
For filing, the deadline is March 15 for the following business classifications:
- Partnerships
- LLCs with multiple members
- Businesses filing Form 1120-S (S-corporations)
On the other hand, the deadline is April 15 for the following:
- Sole proprietorships
- LLCs with a single member
- Businesses following the standard fiscal tax year
As mentioned earlier, estimated tax payments for all businesses that follow the standard fiscal tax year happen quarterly. Below are the payment deadlines for each period. Keep in mind that they also apply to excise taxes.
- First quarter: January 1 to March 31; the deadline is April 15.
- Second quarter: April 1 to May 31; the deadline is June 15.
- Third quarter: June 1 to August 31; the deadline is September 15.
- Fourth quarter: September 1 to December 31; the deadline is January 15 of next year.
If the deadline falls on a weekend or a legal holiday, the deadline will be moved to the following business day. For 2024, the fourth quarter deadline is moved to January 16, as the 15th falls on a holiday (Martin Luther King Jr.’s birthday).
As for employment taxes, the tax payments are made in coordination with the business’s payroll schedule. In most cases, businesses are free to choose how often they pay their employees (up to monthly), but some states enforce a maximum interval. Check out this guide by the Department of Labor to see if your state has such laws in place.
Ensure adequate cash supply
There’s no doubt that this last piece of advice is a no-brainer. That said, a business handles a lot of expenses, from operations to wages, so it’s easy to lose track of how much it has in its coffers. The last thing any owner wants to experience is footing a tax bill it can’t pay off.
This is why business accounting always accounts for earnings before interest and taxes (EBIT) and cash flow after taxes (CFAT). Key to these calculations is depreciation, or how much value an asset loses over time. EBIT is what you get after deducting the depreciation with gross income; subtract that from the tax value, and you get CFAT.
The best practice for this isn’t as complicated as you may think. It only requires fostering a work culture that promotes proper cash management, one of which involves keeping a close eye on the business’s tax obligations. CFAT is far from being the absolute metric of a business’s financial health, but it speaks volumes about its approach to handling money.
Conclusion
Small business tax preparation may be at rock bottom of a business owner’s list of things they want to do, but it’s a necessary task. Taxes fund every facet of daily life in a country, including the deductions and tax breaks the private sector enjoys. In a way, filing and paying your taxes on time helps businesses, big and small, save on taxes.
Small Business Tax Preparation article and permission to publish here provided by Claire Glassman. Originally written for Supply Chain Game Changer and published on October 30, 2023.
Cover photo by pexels.com.