Note: The IRS has extended the tax deadline for individuals and businesses by 90 days due to the coronavirus. If you have questions or need advice about adjusting an area of your business during this time, we’re here to help. Check out Fundbox’s coronavirus response plan and resources.
It’s tempting to close the books on your business taxes after you file them, but handling a few more tax-related tasks now can set you up for success next year.
“It’s important for business owners to get ahead with their taxes whenever they can,” said Brandon Pfaff, a CPA and advisory board member of Wealthy Living Today. “One of the easiest ways to do this is while it’s fresh in their minds right after filing.”
“Many business owners wait until the last minute to organize day-to-day records,” said Christina Sjahli, a CPA and the owner of Christina Sjahli Consulting. Not only does this cause unnecessary stress, she said, it can also hurt your business’ finances. If you lose receipts or documents, you may not be able to claim certain tax deductions.
Instead of procrastinating your tax prep, get ahead. Using Q2 to review your business financials can help you save money, avoid audits, and set better financial goals. Follow these four steps for ultimate tax preparedness.
1. Review your tax return with an accountant
It’s critical to check your tax return for errors before filing, but it’s just as important to review your return after filing, too. You need to understand the struggles you or your accountant had preparing your tax return, Sjahli said, “so you can improve the process within your business for next year.”
Take the time to ask questions about your depreciating assets, deductions, refunds, or payments. You may notice differences in your taxable income and profit and loss statement, for example, and it’s important to understand why, Sjahli said.
You can also use the review to reevaluate your business’ admin processes or record-keeping methods. If you struggled to track all of your business expenses, for example, ask yourself why. “Do you need to create a new expense category to make it easier for your tax accountant to identify tax deductions?” Sjahli said. Or, maybe you need to invest in book-keeping software.
The more knowledgeable you are about your business taxes and financials, the easier it is to make smart financial decisions and identify areas for improvement.
2. Organize and update financial documents
Sorting your business’ financial documents now doesn’t just save you time next tax season, it also ensures next year’s taxes are more accurate. “Saving all relevant documents from the freshly filed return is paramount,” Pfaff said. That includes profit and loss statements, balance sheets, receipts, invoices, and canceled checks.
Before you put papers away, revisit your filing system to make sure it’s effective. You can go the chronological route and organize documents by year, quarter, and month, Pfaff said. Or, file them by client, project, or vendor, Sjahli said.
As you organize files, set aside any you need to update, like your balance sheet and profit and loss statement. It’s helpful to update these to account for your tax refund or tax expenses, Sjahli said. Finally, make sure you store your files somewhere accessible but secure. “Saving documents to a cloud storage drive is an excellent option in the case of loss or damage to onsite computer systems,” Pfaff said.
If you haven’t already invested in accounting software, now’s a good time. Platforms like QuickBooks can help you track your business financials and monitor accounts payable and receivable. Other apps like Expensify let you scan and upload receipts, while Stride tracks your vehicle mileage.
3. Schedule tax payments and check-ins
Planning ahead can help you stay organized and prevent unwelcome financial surprises. Start by paying your tax bill on time, Pfaff said. “Making sure you pay or set up a payment plan with the IRS can save you a lot of money in penalties and interest.” From there, he recommended scheduling your quarterly estimated payments to “reduce any potential underpayment penalties.” Try adding reminders to your calendar or setting up automatic bank deposits.
It’s also a good idea to schedule regular check-ins with your accountant. “While outside help may seem like an unnecessary expense, a quality advisor is worth their weight in gold,” said Pfaff. “Working with an accountant or tax preparer on a regular basis can also help you stay ahead of things that can pop up during the year.” Think: estimating quarterly payments or evaluating short-term funding needs.
4. Create a financial plan
Work on developing or updating your business’ financial plan. “Without financial planning, your business can lose direction and miss executing strategically,” Pfaff said.
Start by creating an annual budget, then break it into quarterly, monthly, and weekly plans to stay on track, Sjahli said. Include the following in your plan:
Expenses: Separate this section into fixed and variable costs. Fixed costs are payroll, rent, and loan payments, while variable costs include inventory, utilities, supplies, marketing and advertising, and office updates or maintenance. Make sure to also include one-time expenses, Sjahli said, like the cost of relocating.
Income statement: Include your business’ revenue, cost of goods sold, and expenses to show how much profit your business is earning.
Balance sheet: List your business’ assets, including cash, property, accounts receivable, and equipment, as well as your business’ liabilities, which include loan payments, accounts payable, and income taxes.
Cash flow statement: Calculate the difference between your business’ outgoing cash flow and cash flow revenue to see whether you have a positive or negative number.
Growth projects: Outline the growth projects you plan to do this year, along with their costs, Sjahli said. That might include a deposit for a new office space, upgraded machinery for a big project, or a bulk order of supplies for a new product.
Get ahead of your taxes
Preparing for next year’s taxes now can save you time, money, and sanity. In addition to working with an accountant, focus on organizing your financial documents and creating a plan to track spending, maximize deductions, and ensure steady cash flow.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Please consult a tax professional for information about tax laws and how they apply to your business.
Ready for more?
Apply for funding and find out if you qualify today