For many people, tax season can be a mad scramble full of document-hunting, form-filling and nail-biting. But it doesn’t have to be.
Starting your tax prep before December 31st can make your life way less stressful—especially if you own a business and plan to claim deductions.
If you want to get a head start on your taxes this year, follow our guide to getting your business ready for tax season:
Step 1: Get your bookkeeping in order
Without updated books, you can’t file your taxes. Here’s what you need to do before tax season hits to get your books in shape.
Make sure all of your business transactions are recorded properly
Screwing up your taxes because of a missing or erroneous transaction can be stressful—but also easily avoidable.
Make sure you’re recording all of your business transactions in your general ledger, and that you’re categorizing each transaction as accurately and consistently as you can. If you’re paying a developer to build an app for your Cat Cafe, for example, don’t record it as an “investment” one month and a “marketing expense” the other. Be consistent.
Make sure your books are balanced
If you use double-entry accounting, make sure that your books are balanced—that is, that the sum of all the credits is equal to the sum of all debits.
If you’re using a program like QuickBooks, don’t worry about this part—it should be done automatically. If you’re doing your bookkeeping on paper or in Excel, check out our guide to double-entry bookkeeping.
Reconcile your bank accounts
“Reconciling” here is just a fancy accounting term for “make sure your books match your bank records.” But doing so can save you and your bookkeeper loads of time and trouble in April.
Separate personal and business expenses
Not separating personal and business expenses can become a huge headache around tax time. It generally takes more time to sort through expenses when they’re mixed up in one account, and you might miss some deductions.
Overwhelmed by the amount of paperwork involved in tax prep? Intimidated by the mass of receipts, invoices and payroll records gathering dust in the corner of your office? Worried about losing your records in a fire?
You can solve all of these problems by digitizing your records. Here are some tools that can help:
A dedicated business document scanner, like Fujitsu’s ScanSnap and the Kodak Alaris (these machines can process large numbers of documents at once and take care of the filing process for you, saving you hours of work).
Talk to a professional
Doing everything yourself can be a great way to save money, but we strongly advise that you have an experienced CPA or tax professional take a look at your books. They can make sure you’re set up properly, that you’re taking advantage of the right year end tax moves, and that your business is in good shape for tax season.
Step 2: Take stock of any year-end tax moves you can make
Here a few moves you make before midnight strikes on December 31 to lower your tax bill:
Salvage bad debt deductions
The IRS allows you to deduct “bad debt”—money that someone owes you but can’t pay you back—from your taxes. But only if you can prove that you took steps to collect it. Use the last few weeks of 2018 to try to collect these debts, and keep a detailed record of your efforts.
Once you know which debts aren’t collectable, check the IRS website for a comprehensive guide to claiming them.
Make office improvements and repairs
Depending on the nature of your business, the cost of making minor repairs to your premises could be tax deductible, which means you’ll want to make them before December 31.
Just remember: “repairs” and “improvements” aren’t deducted the same way, so make sure to consult your CPA or tax advisor before spending any money.
Invest in or research a new line of business
As long you don’t spend more than $50,000, the IRS lets you deduct $5,000 in expenses connected to “creating an active trade or business or investigating the creation or acquisition of an active trade or business.”
If you were planning to research a new line of business or acquisition in the next few months, now might be the time to do it. These deductions are complex, so make sure to talk to a CPA before launching that blockchain poke bowl startup.
Invest in equipment
If you buy a building, vehicle or equipment for business use, you may deduct up to $1 million of those expenses under Section 179 of the IRS Code.
You can spend up to $2.5 million total on Section 179-deductible equipment, but it must be put into use the same year in which you claim the deduction.
Step 3: Set aside enough tax money
Use the 30% rule
If you’re not sure how much you owe in federal taxes, set aside 30%. That’s how much experts say you should set aside if you’re not clear on your exact tax obligations.
Choose a saving method
You have three options for how to save up for taxes.
The per-payment method
Every time you receive a payment from a client or customer, put 30% of it into a business savings account. Ideal for beginners who don’t have a good sense of how much they’ll be making this year.
The monthly method
Total up all the income you’ve made this year so far, divide it by the number of months to get your average monthly income, and calculate whatever 30% of that is. That’s how much you should be putting aside in taxes. Ideal for businesses that are just starting to make a profit, who expect to pay more taxes this year than last.
The yearly method
Take last year’s business total income, divide it by four, then calculate 30% of that amount. The result is how much you need to save (and pay) for your quarterly estimated tax payments. Ideal if you don’t expect your business income to drastically change this year.)
Keep your tax money in a separate account
To avoid the temptation of dipping into your tax savings, you should keep them away from your day-to-day finances in a separate business bank account.
If you don’t want to think about setting aside money every month or quarter, consider setting up recurring automatic bank transfers into the account.
Get clear on state-specific taxes
In addition to federal taxes, there are state and local taxes you might need to pay, including sales, franchise, property, and excise taxes.
Read up about state-specific taxes well ahead of time (these should be available on the website for your state’s tax authority) and work with your CPA to make sure you aren’t forgetting any.
Step 4: Read up on tax reform (and how it affects you)
The Tax Cuts and Jobs Act (TCJA) took effect on January 1, 2018, and it will mean big changes for the way C corporation and pass-through entities pay their taxes.
Here’s a brief summary of how the TCJA might affect your return:
C corporations get a flat 21% income tax rate
This is a huge tax break for businesses of any size. Whether your C corporation earns $1 or $100,000,000, you’ll pay 21% of that amount in income tax.
Pass-through entities get a 20% tax deduction
If your company is a pass-through entity, the most significant TCJA change is a tax deduction of up to 20%, which will be applied to your Qualified Business Income (QBI).
But there are some limitations, especially if you’re a Specialized Service Business (lawyers, consultants, artists, etc.) or if you have employees. It’s complicated—check out this guide from the Tax Policy Centre for a full breakdown of the deduction.
No more write-offs for games of golf or courtside tickets with a client
That’s right: the TCJA has completely eliminated or drastically reduced some common expense deductions for businesses, including:
Client entertainment expenses (used to be 50% deductible, now 0%)
Office snacks and meals (used to be 100% deductible, now 50%)
Employee transit and parking benefits (used to be 100% deductible, now 0%)
How to change your books for the TCJA
The IRS hasn’t published a full summary of all the deduction changes yet. To prepare for them, we’d recommend you make two changes to your bookkeeping:
Create a separate ledger for client meals and client entertainment, since they may be deducted differently
Create a new ledger called “Transportation Fringe Benefits,” since they’re deducted differently than other fringe benefits under the TCJA