Income Tax Returns is one of the least favourite certainties; just as the new tax season enters, the hustle and bustle to file taxes on time without incurring any penalty begins. Preparing for tax season is certainly not an exciting thing to do, of course. But getting your business ready for the new tax season for filing accurate income tax returns should be your foremost priority because entering the tax season unprepared can be stressful and burdensome. Business owners especially are urged to take extra care because the responsibility to account for the relevant business expenses and transactions is doubled. Paying for taxes is just an unfortunate part of the job that has to get done one way or another and non-negotiable. Instead of whooshing and flailing at the last moment, it is better to get a jump on tax season and enter prepared and organised. You can also work with an accountant or financial professional to put together information on time and minimise the burden.
To complete your tax return in business, read the complete piece to learn about the best practices involved in preparing for income tax returns.
1. Get Back to Previous Information
Analyse your previous year’s return, particularly the federal Schedule C, where you reportedly enter most of the information about your business. Significant changes might occur, but last year’s tax return may jog your memory of the business finances you typically report and whether or not you claimed expenditures related to a home office, for instance. Also, review any tax code changes because not knowing about recent reforms could give you trouble preparing the taxes.
2. Be Cognisant of Tax Deadlines
Make it a habit to pay your taxes on time to avoid any penalties. Always be aware of income tax filing deadlines as well as the most publicised tax return due dates. Furthermore, your business might be subject to other deadlines throughout the year. Being aware of your business structure’s significant dates will help keep the appropriate records and budget the money you owe. Additionally, you will need to be mindful of all the federal and state tax deadlines. Examine the IRS calendar made available for business and the self-employed for actions required to take each month concerning your federal taxes.
3. Collect and Organise your Records
‘A stitch in time saves nine.’ Timely collection and organisation of your records will save you from experiencing stress and minimise the burden. Keeping thorough and accurate records will ensure your tax return is correct and causing any blunder throughout the year. Tax paperwork can be time-consuming. It might take hours, if not days, to collect and organise all of your records. Invest a small amount of time each day to work on your taxes to avoid the last-minute hassle, and you don’t feel overwhelmed. Poor and inadequate records could cause leaving deductions or, worse, put you at risk for an audit.
Tracking of all your income and expenses could be quite chaotic. So, consider creating a particular digital folder or paper-based holding place for all of your tax-related documents or organise it in an accounting software if it helps. Keeping accurate records of your business expenses and transactions will be instrumental in helping you arrange the required statements and information to prepare your income tax return.
Your recorded information needs to ratify the income, expenses, transactions, and credits declared on your tax return. You must thus be able to provide proof of any reflecting entries, deductions, and statements on your tax return. You should have all the records from the bank, credit card receipts, invoices, canceled checks, cash slips, business receipts for subscription, and memberships, among others, in addition to your previously filed IT returns.
4. Monitor your Financial Statements
You should consider three primary financial statements- your income statement, cash flow statement, and balance sheet. To be precise, monitoring the said financial statements will provide you a fiscal picture of where your business stands truly. In doing so, these statements can give you a rough idea of what your future business tax may look like. If any changes you feel are required, compare your present finances to your previous IT returns to determine it.
5. Use an Accountant to Prepare your Taxes
Most businesses — either small or large, already have or hires an accountant or a qualified professional who prepares their taxes and handles them for them. But of course, to hire or not is your individual choice. Preparing tax sheets or forms is never an easy task. If you decide to self-prepare your business taxes for whatsoever reason it is — chiefly because self-preparing your taxes devours a lot of time you are not qualified enough, you possibly could cause a blunder.
If at all possible, hire an accountant to the calculations for you. But be sure to have a background check of their experience, client reviews, references, and referrals. It is essential to vet them before hiring.
6. Discrete Business from Personal Records
Filing your business taxes will be easier if the business finances are kept separate from your finances. Besides causing tax time nuisances, associating personal and business finance records can keep you from getting a trivial business loan or building business credit. Moreover, mixing your business with personal expenses could be troublesome. If the IRS audits and finds them mixed, they might look into your finances because of commingled money, regardless of whether you reported business finances correctly.
In addition to causing tax time nuisances, mixing personal finances and business finances can keep you from building business credit or getting business loans. Failing to do so will cost you several hours of scouring through expenses to tell apart personal from business expenses and transactions. So, it’s wiser to set up a separate bank account and credit or debit card for your business and avoid incurring any personal costs in those accounts.
7. Cogitate Deductions
The government offers various deductions and exemptions to employees to claim on IT return. Consider all possible deductions and exemptions you can claim on your business tax return. Make sure to keep a record of all that you think you’ll be able to deduct something from.
Do things before the end of the financial year to increase the number of deductions and exemptions you can claim. Before you decide to spend money on which you plan to deduct, be definite that your purchase qualifies for a deduction.
8. Reconcile your Bank Statements
Bank statement reconciliation — reviewing your bank account statements against your business records. The result should be the same amount. Reconciling bank statements helps you spot inaccuracies and errors and keep accurate records. If you catch any errors, make sure to deal with them straight away.
You need to reconcile your accounts time-to-time regularly. If not reconciled, then everything will have to be reconciled from the start before filing for your taxes. Or else, you might report the wrong figures on your IT return.
Reconciling your bank account is imperative even when you have hired an accountant. Providing unreconciled accounts to your tax professional will make arranging your accounts more challenging and only cost you extra.
9. Check for Possible Audits
Getting audited can be an invasive and nerve-wracking experience, one that you don’t want to happen, and if it does happen, you would not want it to get repeated.
What’s comforting is that a good accountant — if hired, will be able to vet your past and present fiscal state and articulate whether or not the IRS could audit you. As experienced professionals, they know what to look for in the records because they can comprehend what may cause an audit. This is why it is incredibly beneficial to have a professional working for familiarity with the system.
Once you are done with your business taxes this season, it is enticing to avoid thinking about taxes again until next season. Learn from doing this year’s taxes and set yourself up for a more comfortable and stress-free process next season. However, you may well also use the beginning of the year as a chance to improve possible slip-ups.
Taxes are anyway non-negotiable. But with proper planning and preparation, you might be able to make the entire process slightly easier.
1) Coronavirus Tax Relief for Small Businesses
2) How does the Income Tax System work in India?
3) Why Do We Pay Income Tax in India? Importance, Applicability & more
4) What Is Negative List Under Service Tax?