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.
Check out our guide on how to categorize business transactions if you’re feeling unsure of what to bucket them as.
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” 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.
Your bookkeeping isn’t really done until you’ve checked it against what the bank says.
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.
Generally, individuals conducting business can deduct expenses that are both ordinary and necessary. An expense is considered ordinary if it's commonly and widely accepted in the industry, and necessary if it's suitable for the business. An activity is deemed a business if it's undertaken with a reasonable expectation of making a profit.
The Internal Revenue Service (IRS) assumes an activity is profit-driven if it has produced income in at least three out of the past five tax years. However, this evaluation is based on the specific details and context of each situation.
To determine if your activity is recognized as a business, read more in our comprehensive guide. In short, the sooner you open a small business account and separate your personal and business accounts, the better.
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.
With a premium Bench subscription, you get access to unlimited, on demand consultations with our tax professionals. This means you can have as many calls for your peace of mind at no extra cost.
How Bench can help
Filing taxes may be the finish line, but bookkeeping is the marathon that gets you there. With Bench, you have a team of experts running that distance for you.
Your Bench bookkeeping team automates your financial admin by connecting bank accounts, credit cards, and payment processors to import information into our platform. Your team also answers questions and completes your tax prep ahead of filing.
With a premium Bench subscription, we handle your bookkeeping and provide year-round tax services, including tax filing. We file your federal and state taxes and give you access to unlimited, on-demand consultations with a tax professional. We’re here to ensure you’re up-to-date on the latest tax information, maximizing every deduction and seizing available tax credits to minimize your tax bill. Learn more.
Step 2: Get your deductions and paperwork organized
A big part of the tax season scramble is hunting for receipts. You need proof for all your deductions, just in case you get audited by the IRS.
Once you’ve completed Step 1 and your transactions are all tagged, you’ll have a better idea of which receipts you need to track down.
Not sure which expenses are tax-deductible? Start with this big list of tax deductions.
Go paperless
The IRS requires you to keep all business records for three years. 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:
- Secure cloud storage services like Dropbox, Evernote, or Google Drive. Any of these websites will support scanning and storing.
- 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).
- A dedicated receipt app such as Receipt Bank or Shoeboxed.
Step 3: Set aside enough tax money
If you owe at least $1,000 in taxes, the IRS usually requires you to make estimated tax payments through the year. Setting aside tax money becomes a lot less painful if you follow a few simple rules:
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 corporations 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 adjust 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
