It’s here—and you can’t escape it. It's tax season again.
While this time of year can be frantic as business owners scramble to dig through receipts and records and make sure they have everything they need to finish their tax returns on time, it doesn’t have to be so stressful. If you start early and approach it systematically, tax season can be a great time to better organize your business finances and find ways to shave your tax bill for 2013 and beyond.
Our new tax toolkit covers the key steps you need to take to get your records in order so you can prepare your tax returns. Here's how to make the most of this tax season:
1. Get Organized
Gathering and organizing your 2013 financial statements, receipts, invoices and tax records will help make your tax preparations easier and reduce the risk of errors on your return. Ideally, you've diligently kept organized records and filed away expense receipts throughout the year—perhaps even using an accounting program, such as QuickBooks or Sage 50 Accounting, or a professional bookkeeper. If not, now’s the time to make sure you have all your ducks in a row.
A good first step is to review all your financial records for 2013 to make sure the numbers add up and that the records and documentation are accurate and complete, says Carol Markman, a CPA and consultant at EisnerAmper in Syosset, New York. It’s up to you to make sure you have the needed documentation to back up your tax return in case you get audited, so gather and review any records that will factor into your tax return's accuracy, including these:
- Bank statements
- Balance sheet
- Business expense receipts—both cash and credit
- Employee records
- Quarterly estimated tax filings
- Sales tax collection records
Also make sure you have receipts—either electronic or in paper format—of all the business expenses you plan to claim for 2013. For meal and entertainment expenses, you'll want to keep not only the receipts but also make a note of who you were with and the business purpose of the expense. “If you don’t keep track of it, come the end of the year, a tough auditor could say no part of that is deductible because you have no documentation,” Markman says.
Markman recommends that businesses keep their various types of expense receipts—such as office supplies, travel and utility bills—in separate folders, which will make it easier to log those various expense categories come tax time. Some businesses opt to keep their receipts digitally and use scanners or apps like Receipt Filer or Shoeboxed that make it easy to electronically capture and save receipts. That works, too, Markman says, but it’s important to be consistent and either keep all records digitally or in paper format. Also make sure that you have a backup of any digital records saved in a secure place in case your computer crashes.
If you're using an accountant to prepare your tax return, Markman suggests making it easier for them by putting all your tax-related documents and financial statements on a jump drive so your accountant can quickly and easily download it. Having the records stored in one accounting program makes it easier on the CPA and can ultimately reduce the cost of your tax preparation—especially if you're paying the accountant by the hour.
But even if you do your own taxes, it can pay off to make sure records are neatly organized because you'll be holding on to that backup information after you file your return. Businesses should generally hold on to all their annual tax returns and backup documentation, such as expense receipts and income statements, for at least six years in case they get audited.
2. Send Income Statements to Employees and Independent Contractors
You must send out W-2 wage and tax statements to all your employees and 1099-MISC forms to any independent contractors who earned more than $600 from your business in 2013 by January 31. If you've been keeping good payroll records or use a payroll service, sending employees their W-2s is generally quite straightforward. Reporting requirements for independent contractors, however, can be trickier and more prone to errors.
For one thing, businesses need to be careful about incorrectly classifying workers as independent contractors if they should really be counted as employees under federal rules. The IRS has been increasingly on the lookout for businesses that mislabel employees as contractors, says Eric Levenhagen, owner of ProWise Tax & Accounting in Mason City, Iowa. Sometimes businesses want to classify someone as a contractor because it’s often less expensive to treat someone as a contractor rather than an employee. But, Levenhagen says, “if you treat them like an employee, they most likely are.”
The IRS has a 20-factor test it uses to determine whether someone you hire is indeed a contractor. Some of the key factors include whether the worker has the flexibility to set their own schedule, where they work (home or in the office) and how they get paid.
If you're at all concerned about incorrectly classifying an employee as an independent contractor, it’s a good idea to speak with an accountant before sending out your 1099 forms. The accountant can look into the matter and determine what a worker’s designation should be.
3. Find the Right Accountant or Tax Preparer
A 2013 survey by the National Small Business Association found that 84 percent of small businesses surveyed said they hire a tax professional to prepare their taxes. And that makes sense for most businesses: Doing your own taxes—even if you're using a program like TurboTax—can be time consuming and burdensome if you have employees, claim a lot of deductions or have complicated business tax issues. Trustworthy and smart tax professionals can often pay for themselves by pointing out deduction opportunities for your business, helping you with overall tax planning, and reducing the chance for errors. An accountant can also be very helpful if your business ends up getting audited by the IRS or your state’s tax auditors.
If you want to hire an accountant or other tax professional to help you with your taxes, look for someone with ample experience working with your type of business or industry. That will increase the chance that the preparer knows all the tax breaks you're eligible for as well as understands your unique tax-reporting requirements.
That said, there can be times when using tax-preparation software program like TurboTax or TaxACT makes sense and will save you money, says Julian Block, an attorney in Larchmont, New York, and the author of the book, Julian Block's Easy Tax Guide for Writers, Photographers, and Other Freelancers. A sole proprietor or a one-person business with rather simple and straightforward tax return needs may be able to save hundreds of dollars by using do-it-yourself software, Block says.
Another option: Do your own taxes, and then have an accountant review your returns for any errors or potential missed opportunities. Some preparers will charge a fraction of the usual preparation costs—as little as 25 percent—to review a prepared return, Block says.
4. Make Sure You Haven’t Missed Deductions You Qualify For
One big value of hiring a tax professional is they can help you find deductions you qualify for but aren’t aware of. Some of the more commonly overlooked business tax deductions include ones for home offices; meal, travel and auto expenses; software and subscriptions; employing your children; and insurance premiums, including health insurance premiums for you and your employees.
“Sometimes car washes or even satellite radio subscriptions for vehicles used for the business are overlooked,” Levenhagen says. An experienced tax advisor can walk you through all your activities and property and help you identify deductions you might have missed. They can also explain how your business can best document these deductible activities so you don’t get in trouble with the IRS or state tax officials. For example, businesses that claim a deduction for their auto mileage are expected to keep a log with the odometer readings of their trips in case an auditor ever questions it.
5. Take Advantage of Last-Minute 2013 Deduction Opportunities
Most 2013 tax deduction opportunities are gone, as the activity must have occurred during the 2013 calendar year. However, there are still a few ways you can potentially reduce your tax bill.
One common method is to contribute to a tax-deferred retirement plan, such as a Simplified Employee Pension Plan (SEP-IRA) or an individual 401(k). “You can set up a SEP-IRA today and still get a deduction for 2013,” says Vinay Navani, a shareholder at Wilkin & Guttenplan PC, a certified public accounting firm in East Brunswick, New Jersey.
A SEP-IRA allows a business owner to defer taxes on 25 percent of their income, up to $51,000, for 2013. An individual 401(k) also allows a business owner to contribute up to $51,000 for 2013, but you would have needed to establish the 401(k) account by December 31, 2013, in order to be able to make 2013 contributions at this point. Contributions for 2013 to both of these types of small-business retirement plans can be made up to your business’s tax-filing deadline, Navani says.
Business owners with high-deductible health plans may also want to try to lower their 2013 tax bill by funding a health savings account (HSA). An individual can contribute up to $3,250 to an HSA for 2013, while a married couple or family can contribute as much as $6,450. HSA contributions are tax deductible, and the savings and earnings can be withdrawn tax free to pay for qualified health-care expenses. As a business owner, you can can open and make a 2013 contribution to an HSA until April 15.
Another possible opportunity to optimize your 2013 business tax bill is to determine whether you qualify for the Section 179 expensing deduction in 2013. This deduction allowed businesses to write off up to 100 percent of the price of certain types of equipment purchases up to $500,000. (That 100 percent write-off limit has fallen to $25,000 for 2014 unless Congress raises it again.)
Many businesses will automatically decide to take the full 100 percent write-off on equipment purchases they made for 2013—and many will find that’s the right decision, Navani says. In certain circumstances, however, it may make sense for a business to use the standard method of spreading an equipment purchase’s deduction over several years. For instance, that could make sense if your business’s income was very low in 2013—making the 100 percent write-off less valuable—but you expect your business income to rise in coming years. “There are situations," Navani adds, "where you might have a loss in the current year and the benefit gets wasted.”
To determine if any of these deduction opportunities would work for you, be sure to consult an experienced tax professional.
6. Consider Getting a Tax-Filing Extension
Many businesses find tax-preparation season is too hurried and they need more time to get all their records organized and their return prepared properly. If this is the case for you, you shouldn’t be shy about requesting an extension, Navani says. You can delay filing your 2013 business tax return until October 15, giving you six more months to make sure you've taken advantage of all potential tax-saving opportunities and correctly completed your return. (Here are the rules and deadlines for filing for an extension based on the type of business you have.)
Keep in mind that an extension doesn't allow you to delay paying any expected tax obligation. You still must pay any taxes you estimate you'll owe by April 15, but you'll have more time to complete the return.
It’s better, Navani says, for a business to either get its tax return done early—in February, say—or file for an extension. “The time of year you don’t want your tax return done is between March 15 and April 15,” Navani says. “It’s like going to the hospital in June when all the interns are working. I recommend to my clients, ‘Let’s not rush this. Let’s take an extension, and make sure we get it right.’ ”
7. Start Planning for 2014 Taxes and Beyond
One of biggest benefits of tax-preparation season is that it gives business owners the opportunity to do some long-range tax planning, Levenhagen says. You might discover, for example, a deduction opportunity that you missed in 2013 that you want to claim in 2014. Or you might want to look at your 2014 income projections and decide whether it makes sense to take advantage of certain expensing opportunities and tax breaks in 2014 or hold off until a future year.
As Levenhagen says, “You want to be looking forward, not just backward.” Planning ahead now will save you time and help eliminate stress in the future.
Read more articles on taxes.