Do you always struggle during the tax season? Are you looking for a small business tax preparation checklist that makes your life easy? Here’s a list of things to do when preparing for the tax season as a small business owner.
Small Business Tax Preparation Checklist for Business Owners
1. Meet your Bookkeeper
Whether you have hired a bookkeeper or outsourced, make sure that you spend some time reviewing previous year’s books and that they’re resolved. If required, use a bookkeeping software.
Bookkeepers don’t help you prepare taxes but they’ll know the problems you’ll most likely face, and their solutions. That’s why this point is at the top of our small business tax preparation checklist.
2. Log your mileage
While you can avail tax benefits on the driving miles covered as a part of your business, it’s important to track your mileage correctly.
There are plenty of mileage logging apps like MileIQ & Everlance to help you do that. Before visiting your tax consultant, make sure that your mileage log is up-to-date and you have properly classified your trips as personal or business. Don’t estimate your mileage. The IRS requires you to keep an accurate log for it.
3. Keep your bank statements in order
The third tip on our small business tax preparation checklist is to gather all your bank statements in one place. Your business may have multiple bank accounts, and receive payments in multiple ways.
Keeping your statements in order will help your tax preparer review your bank balance, and ensure that it matches your balance sheet. It will also ensure that your expenses and revenues are accounted for in bookkeeping.
4. Note all business expenses that you have paid from your pocket
You may have paid for some of the businesses expenses through your personal debit card, or PayPal account. For example, you might subscribe to a business service through your personal credit card.
Make sure you capture all these expenses in a spreadsheet and provide it your tax consultant. If you have used your personal funds for business expenses, then they are legitimate tax deductions.
If you realize it only after the tax season, then ensure that you update your next year’s bookkeeping by debiting your expense account and crediting your equity account.
5. Note all personal expenses paid from business funds
Similarly, you also need to note all the personal expenses you make using your business account. For example, you might be in a hurry and pay at a grocery store with your business card.
These personal expenses should be carefully recorded in bookkeeping so they are not deducted as business expenses.
6. Gather any 1099 & 1099-K Forms you have received
1099’s are forms used by the IRS to ensure that taxpayers are reporting their income correctly.
Since 2012, credit card and payment processors like PayPal are required to submit 1099-K, to report payments of more than $20,000. In fact, 1099-K’s are required even if your business gets more than 200 transactions a year.
Tax preparers use these forms to ensure that their clients are reporting at least as much amount as mentioned in their 1099’s.
7. Keep receipts for all asset purchases handy
Anything that you purchase for your business – like furniture, computers, chairs, vehicles – are considered an asset to your business, and is eligible for tax deduction.
However, you’ll need to depreciate its value properly before you claim a deduction. So your tax preparer will need to know when you bought an asset and at what purchase price.
8. Review your loan balances
Many business owners make the mistake of including the entire loan payments into deductions. This not only makes the loan balance appear wrong in your balance sheet, but also doesn’t separate the interest payments.
Remember, loan payments against the principal amount is not tax-deductible. Only the interest on loan is eligible for tax deduction.
Review your loan statement with your bookkeeper and ensure that the loan balance on your balance sheet matches the balances on your loan statement.
Tax preparation is time-consuming, no doubt. If you record your income and expenses regularly, and gather their documents in one place, it will be easier for your tax preparer to prepare your tax returns. Hopefully, this small business tax preparation checklist will help ease the pain of tax preparation. With due diligence, you will avoid overpaying, and even save a lot of taxes for your business that you can re-invest for growth.