Tax Tips for Small Businesses
Now that tax season has passed, most of us are probably trying to forget the stress and anxiety often associated with filing taxes. Taxes are complicated, particularly for small businesses, and before you put them out of your mind for the year ahead, take a moment to look over these helpful tips to make the process a bit easier, the information more accurate, and the filing process less stress-inducing moving forward!
Keep accurate records.
We’ve heard it countless times from small business owners; paperwork is the worst. Many individuals have a wide range of skills and strengths that contribute to the business that they’ve started, however, those skills often do not pertain to the somewhat arduous process of record keeping.
Leading up to tax season, maintaining thorough and accurate records of all your business associated financial transactions is crucial. This includes records of sales, expenses, and receipts. Gathering and keeping track of this information will make it infinitely easier to track your deductions and ensure compliance with tax regulations.
Not keeping accurate records leaves you at risk of submitting an inaccurate tax return, being audited, and losing valuable deductions which could save you a lot of money.
Unsure of how to go about tracking your sales and business related expenses? Here are a few ways to get started!
Use accounting software. You can track your business expenses with the help of several accounting software options such as QuickBooks, Freshbooks, or Xero. These programs allow you to categorize expenses, track payments, and generate reports.
Use a dedicated credit card or bank account for your business expenses. This makes it easier to separate personal and business expenses as well as simplify tracking and categorization.
Keep physical copies of your receipts and organize them in a file or folder. This helps to keep track of expenses and provides backup information in case of an audit.
Track your expenses in real-time. Do your best to record expenses as they occur through a mobile app or spreadsheet to avoid losing receipts or getting behind on your record keeping.
Keep a mileage log if your business involves driving. Tracking mileage for all business-related trips can contribute to helpful deductions when filing in the future.
Plan time into your schedule to review your expenses. This can help you catch errors early and assess areas where you can cut costs for your business.
While detailed record keeping can seem tedious, it is a relatively simple way to make filing your taxes much easier in the long run.
Understand your tax obligations.
Tax obligations can vary from business to business and state to state, so it is important to know what is required of you going into tax season. Be aware of the various taxes your business is required to pay, such as income tax, sales tax, and payroll taxes. Make sure that you are collecting and remitting these taxes on time and in accordance with relevant laws and regulations.
Because tax regulations can change from year to year as well, make a point to stay up to date and informed about changes in tax laws and regulations which may affect your business. This can help you avoid penalties and ensure that you’re always in compliance with current regulations.
Minnesota requires businesses to pay state income tax, sales tax, and withholding tax. Make sure you understand your obligations for each and that you submit the necessary forms and payments on time.
Claim all eligible deductions.
Do yourself a favor and be sure to claim all deductions you’re entitled to, such as business related expenses, travel expenses, and home office deductions. This can help lower your tax bill and ultimately improve your bottom line.
Here are some examples of tax deductions for small businesses that could be claimed on your return:
Your car, if you use your personal vehicle for business purposes (mileage rates)
A home office, if you operate out of your home
Insurance premiums
Business books and educational materials
Office supplies
Business travel expenses, including meals, entertainment, and tips
An office coffee service
Tax preparation resources
Office equipment
Consider hiring a tax professional or an accountant.
You can’t be an expert on everything, and chances are that you do not have the time or resources to become well versed in accounting and taxes on top of being a small business owner. You can, however, utilize the help of a tax professional or an accountant to help you navigate the complexities of tax laws and ensure that you're complying with all regulations.
If you already utilize the assistance of an accountant, make sure that you’re working together throughout the year to track your income and expenses, spot potential cash flow issues, as well as monitor your gross and net profits. Good accounting is crucial for the growth and survival of small businesses, and only working with your accountant during tax season is a missed opportunity. Seeking the advice of a good accountant can help you make the wisest financial decisions for yourself and your business.
How do you go about finding a good financial expert or tax professional? First of all, contact them in the off-season; don’t wait until spring to find one. Many tax professionals are overwhelmed with inquiries in the spring and may not be able to take on new clients, or have the time to give you their best service. Getting to them early ensures you get the help you need.
Additionally, go into your first meeting or consultation with some precise questions in mind, such as:
Are you licensed to practice in this state?
How long have you been practicing?
Do you have knowledge of or experience with small businesses in my industry?
What is the cost breakdown for the services you provide?
Do you provide year-round support?
What happens if I am audited?
Once you’ve established an individual or company that will be a good fit for you and they’ve become familiarized with your business, ask some more questions. For example:
What are some achievable business goals I can set?
Should any changes be made to my employee benefits program?
Am I missing any potential tax deductions?
Are there any carryover losses or set-up expenses I can claim?
What kind of structure is best for my business?
It can be tempting to try to manage everything yourself as a small business owner, and hiring an accountant or tax professional can seem like an unnecessary added expense to your business. However, the peace of mind as well as the added expertise and knowledge of a professional can add value to your business that greatly outweighs the cost.
Take advantage of potential tax credits and deductions.
Tax deductions and credits exist for small businesses on both the state and federal level. Be sure to do your research and make sure you aren’t missing out on valuable resources for your business.
If you’re a small business that is investing in capital equipment or making improvements to your property, you may be eligible for the Small Business Investment Credit, which can help reduce your tax liability.
Minnesota offers various deductions that pertain to small businesses, such as expenses relating to research and development, job training, and equipment purchases. Minnesota also offers the Angel Investment Tax Credit to investors who invest in small businesses with high growth potential. This credit can help attract investment and support your growth if your business meets the eligibility criteria.
IRS Credits and Deductions for Businesses
While planning ahead for tax season, working with an accountant or tax professional, researching regulations and tax credits, and keeping meticulous records are not the most glamorous or enjoyable tasks; they can ensure that you go into filing your taxes with less stress and a lot more confidence moving forward.
