As a business consultant, new business owners often ask me how to handle taxes. While my first response is to recommend hiring an accountant, there are a few things that business owners can and should do to prepare for tax time which you'll need to do regardless if you're filing through a CPA or doing it yourself.
3 Things to Do Before the End of the Year to Prepare for Business Taxes
Separate Personal and Business Accounts
If you own a business, you need to separate your personal and business accounts. Open a separate checking and credit card account for your business, ideally under the business's EIN. Use only these accounts for any business transactions. While this is not always legally required, it will help you prepare your business taxes and figure your P&L. Keeping separate accounts will also help you build your business's credit and help protect you in a lawsuit.
Record Income and Expenses
To file your taxes, you'll need to have a record of all income and expenses. While you can do this using a spreadsheet combined with a folder for receipts, I don't recommend it. Most people will want an app like QuickBooks Online, which I use for two of my businesses. A professional accounting package like that makes it easy to attach receipts you'll need to provide in the event you're ever audited, plus will provide the profit and loss report you'll need to file your taxes. They also regularly put out articles on subjects like this. Click here for a discount on QuickBooks.
We often think of write-offs as the government somehow paying for things for your business. That's not entirely true. You pay for items you use as a business, but most of those things should go into the expenses column when you file your taxes. Stuff in the expenses column offsets your taxable income, meaning you don't pay taxes on that amount.
You “write off” stuff by putting the cost to your business in the expense column. Sometimes, the IRS gives you an allowance for things that may exceed your actual costs, but generally, what you write off is your cost of doing business. Often we as business owners miss expenses, though, so reviewing that regularly and making sure we record everything is key to minimizing the taxes you pay.
For example, let's say you paid $1,000 for a product and sold it for $2,000. Your net income for that product would be $1000, which is the amount you would be taxed on. But maybe you also paid someone to drive 100 miles one way to deliver it and paid that person $60 for their time plus $112 in mileage. And you had shipping costs for the materials of $75. Now your income is $2000 – $1000 – $60 – $112 – $75 = $753. Then you have your overhead costs for things like an office, software subscriptions, marketing, and creating and maintaining an LLC.
All of those expenses reduce your taxable income, meaning you pay less in taxes, but that only works if you're tracking them. Check out the IRS's guide to business expense deductions if you need a checklist of things that you can deduct as an expense.
Identify things you need to operate your business and record them in QuickBooks or whatever you're using to record your expenses. If you've got a lot of excess income, consider buying things you'll need in the future to offset your revenue and reduce your tax bill this year. That way, you can essentially get a discount on those items by using the funds that you would have paid out in taxes to invest in your business.
I hope these ideas helped! If you'd like some help streamlining and growing your business, click here to schedule a time to talk!