6 Tax Preparation Tips for First-Time Small Business Owners

6 Tax Preparation Tips for First-Time Small Business Owners

Keep Business and Personal Expenses Separate Many business owners unintentionally blur the lines between their personal and business accounting services, especially sole proprietors. Fortunately, the problems this causes can be avoided with a little care upfront. From the IRS’s viewpoint, a business must look and conduct itself as a “business.” Mixing personal expenses with those of your company raises the possibility that the IRS treats it as a hobby. To avoid this, maintain separate bank accounts and credit cards in your business’s name and prepare regular statements.

Get Your Records in Good Shape Good and thorough documentation is important, even essential, to justifying many deductions from income.

Entertainment —Keep a diary of all entertainment expenses. Generally, only 50% of food, beverage, and entertainment expenses are deductible, subject to certain exclusions.

Travel —To support mileage expenses on an automobile, you should keep a trip log separating personal and business use.

Review Accounts Receivable and Inventory Balances Before closing your books for year end, review your accounts receivable for collectibility. Any account likely to be uncollectible should be written off since it reduces your revenue and consequently your tax liability. If you have raw, in-process, or finished inventory, review its value for marketability. Obsolete or unusable inventory should be written down to scrap value to reduce revenues and lower your tax bill. Get business accounting services for assistance.

Review Equipment Purchases As per the business income limitation, you cannot claim a Section 179 deduction if it creates or increases an overall business tax loss. Be aware that using Section 179 deductions for real property may trigger high taxes on ordinary income gains when the property is sold.

Bonus depreciation of 50% for the first year is also available for some tangible personal property including software and certain leasehold costs if the expense was incurred in 2013 and the asset placed into service.

Check Potential Tax Credits While credits and deductions both reduce your potential taxes, the former do so on a dollar-for-dollar basis while deductions reduce your taxable income so their net effect is savings equal to your tax rate. For example, suppose ABC Company has a taxable income of $100,000 with taxes due of $22,250. A tax deduction of $10,000 would reduce its taxable income to $90,000 resulting in taxes due of $18,850. The $10,000 deduction produces $3,400 in tax savings.

Prepare For The Coming Year As you progress through your first-year tax filing, note the areas in which you lacked sufficient documentation or discovered decisions which might be modified to result in lower taxes for this year. Rather than waiting until the end of this year to prepare for the 2021 tax season, implement the necessary changes as soon as possible. Confirm all employees’ withholding statuses and update their W-4 information for tax year 2020.

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