No one wants to think about their taxes, but by establishing a few good habits now, you save yourself headaches in the future. We reached out to tax and financial experts to gather their advice on how entrepreneurs can prepare to file their taxes.
Prevent stress by starting early
“Ideally, you should be working on [your records] all year long,” said Kari Brummond of TaxDebtHelp. “Well-organized records are key to streamlining the tax filing process. If you devote a few minutes to bookkeeping on a regular basis during the year, you can just plug in the numbers at tax time.”
She emphasized that scheduling a small amount of bookkeeping time per week will make a major difference down the line. Rather than taking days to organize, you’ll have everything you need to prepare your taxes.
Keep your financial records on hand
Octavia Conner, CEO of Say Yes To Profits, reiterated the importance of staying on top of your records. She suggested that entrepreneurs download their business’s bank and credit statements. As you compile your purchases, check off each individual transaction to make sure it’s recorded.
According to Brummond, typical income records for a small business owner will include Form 1099-NEC, Nonemployee Compensation, from any company that contracted you, Form 1099-K, Payment Card and Third Party Network Transactions, from card payments and third-party transactions and Form 1099-MISC, Miscellaneous Income.
Brummond also provided a detailed list of potential business expenses to keep in mind:
- Wages and payments
- Internet and phone bills
- Business supplies like paper and pens
- Rent for office space
- Meal and travel expenses
- Interest on loans
- Publications and subscriptions
- Education and learning expenses such as a business course
- Business insurance premiums
- Fees for lawyers, accountants or other hired professionals
- Retirement plan contributions to SEP-IRAs, SIMPLE IRAs and Solo 401(k)s
- Health insurance
Feel a bit overwhelmed? Jim Pendergast, Senior Vice President of altLINE, contributed a handy acronym to help you categorize your records.
“I like to use the acronym ‘TIE’ to remember the major categories of business records needed for small business filings,” he said. “‘T’ refers to tangibles and relates to hard material or inventory purchases made the previous year, many of which need to be filed and could come with some write-offs. ‘I’ stands for income and includes all the ways your business took in money that year. ‘E’ stands for expenses, which also opens the door for deductions.”
When asked what area of taxes confuses businessowners the most, deductions were the universal answer.
“Often, people talk about business deductions as if they’re free,” said Brummond. “You might hear someone say, ‘It doesn’t cost anything. I’m writing this off.’ In actuality, the taxpayer has paid for these expenses, and they are not free by any means. However, by claiming these expenses as business deductions, the taxpayer saves some money on the expense. For instance, if you spend $100 and write it off as a business expense, you do not pay income tax on that $100. So, if your effective tax rate is 15 percent, you basically save $15.”
Always make sure to double-check any potential deductions to ensure that you aren’t overpaying unnecessarily. Here are some examples of what business expenses you may be able to deduct:
- $5,000 of your startup costs can be deducted on your first year of business
- Rented office space, along with any utility bills
- Home office expenses can be deducted, as long as you use that space regularly and exclusively for work
- As Brummond explained, “The simplified deduction is $5 per square foot of office space, up to $1500. Or you can write off a portion of your rent, utility bills, home repairs, insurance and mortgage interest based on the percentage of your home taken up by your home office. For instance, if your office takes up 10 percent of your home, you can write off 10 percent of these bills.”
- This includes any repairs to your home office, along with furniture or other items
- You can claim 50% of meal expenses when traveling for business or hosting clients and employees
- Business travel expenses such as transportation and lodging airfare
- Brummond wrote, “If you use your vehicle for your business, you can claim 57.5 cents per mile in 2020. Or you can deduct a percentage of your total vehicle expenses such as gas, insurance, lease payments, repairs, oil, tires and registration fees based on the percentage of time you use the vehicle for business.”
- Interest and fees on loans
- If you don’t have health insurance through your spouse’s employer, you can write off all your health, dental and long-term care premiums
Choose the right management tool
Where should you keep track of your finances? There are options ranging from Excel to powerful accounting software. You may need to try several options to find your best match. We asked our financial experts for their recommendations.
Conner said that an Excel spreadsheet can work, and also mentioned QuickBooks and Xero.
Brummond uses QuickBooks Self-Employed. She explained that the service helps her “…stay on top of my bookkeeping, and it also calculates my quarterly taxes for me. Rather than paying the same amount every quarter based on last year’s earnings, I prefer to make a quarterly tax payment that directly reflects what I’ve earned in the last quarter.”
Pendergast explained that, above all else, cloud-based accounting is crucial. “There’s no substitute for a cloud-based document management system where you store and save all business documents. It’s better to have an overly aggressive or inclusive document management policy than too loose of one. Plus, there are some business records you’re legally obligated to keep for a certain amount of time, such as payroll records for three years. Having a cloud document management system makes uploading and saving these regulated documents pretty perfunctory.”
When in doubt, consult
If you don’t have a financial background, trying to manage taxes yourself can be overwhelming. Conner stressed that reaching out to a tax professional is the best way to truly understand your filings.
“Do-it-yourself tax preparation is akin to ‘do-it-yourself brain surgery.’ The value of having a professional who knows you and your business is that they can help you uncover tax savings measures throughout the year, answer questions and much more.”
Enrolled Agent Steven J. Weil, Ph.D., and President of RMS Accounting, echoed the same idea.
“The tax laws are complex and ever-changing, which is why using the right professional can make a world of difference,” he said. “A qualified tax professional can also handle any IRS or other tax notices and represent you, should your return be audited. A truism in the tax world is that more money is made fixing the mistakes of ‘do-it-yourselfers’ than on actual tax preparation.”