Most business owners don’t pay much attention to tax matters until it comes time to file. They simply hand over their financial and expense data to their CPA and hope for the best, keeping their fingers crossed that total taxes will not be too high.
However, whether you pay taxes annually or quarterly, you should be proactive in how your manage your tax information. Everyday action can help you save money and help prevent an audit.
Practice Good Recordkeeping
The first step in being proactive on your taxes is keeping accurate and up-to-date records every business day. That means doing the following:
- Make regular daily bank deposits.
- Mark your books immediately with each check or payment received from specific customers.
- Keep track of your invoices and mark them as paid when the money comes in.
- Keep track of your payable invoices.
- Keep and file every expense receipt and mark them in your books if they are a tax-deductible expense.
Review and Maximize Your Deductions
Do you know what is tax deductible for your business? Have your CPA make a list of the most important deductible expenses so you know what to mark as the costs arise. Also, check with your accountant for tax credits allowed by the government, such as capital investments or “green” improvements to your facility.
File Your Paperwork
Be sure you file when required to avoid penalties and headaches. This means getting payroll tax information filed and paid quarterly, your self-employment taxes (if applicable) filed quarterly, and all other W-2s or 1999s filed on time.
Avoid Red Flags
The IRS has drastically increased the amount of time spent auditing and scrutinizing small business tax filings in the lastfive5 years. Don’t give them a reason to audit you. Here are some tips:
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Independent Contractors or Employees? – Be sure that if you use independent contractors that they do not fall under the definition of “employee.” Check with your CPA to find out the definitions of each and how to avoid getting fined.
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Determine Deductions Judiciously – Expenses that keep your taxes lower are great, but you want to ensure you are not deducting too much. Total deductions of 35% or more of your gross adjusted income may raise an eyebrow of the taxman.
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Report All Income – When it comes time to file, be sure you report all income. This should not be just your sales revenue, but other sources, such as interest income, concession income, investment income, etc.
While April of each year is considered tax time, managing your taxes all 12 months will help prevent the IRS auditor from coming to your door.
