Managing a business is difficult enough without including the complication of filing taxes. Some business owners don’t even know when tax season starts or ends. While tax season can be quite stressful, there are things you can do to help you through the process.
One of the best things you can do for your business always stays on top of your finances by working closely with a professional accountant. This makes it easier to navigate tax season as you will have everything you need to file your taxes accurately. Below are five tips to help you through the tax season:
1. Understand Your Eligible Expenses
You can claim any money you spend in relation to the business as a tax deduction. However, this is only applicable under reasonable circumstances.
For example, if you take a client out for lunch to discuss business, you can only deduct the cost of the lunch, but you can’t deduct every other lunch from your taxable income. If you work from the house, you may deduct only the office expenses and not your full mortgage.
Below are some items that are eligible for tax deductions:
- Medicare and social security taxes
- The cost associated with child care
- Charity contributions
- Medical and health insurance coverage for self-employed individuals
- Sales tax
With the 2021 tax season extended to the 17th of May for individuals to file their taxes, it’s essential to know what can constitute a tax deduction to help you save some dollars. Make sure you remember to deduct the above costs to help you lower your tax bill and increase your refund.
2. Hire the Right Accountant
The right accountant for your business should do more than just file your taxes and prepare frequent financial statements. A small business requires a hands-on accountant who can help the business owner save money wherever possible.
When hiring an accountant, don’t forget to include tax planning in their KPIs. Tax planning is the process of analyzing a business’s financial situation and looking for the right ways to lower the tax bill while ensuring all elements of the business are working effectively. This guarantees that your business is working efficiently while legally paying the least amount of taxes as possible.
Work closely with your accountant to track and record any financial transactions, incomes, and spending to streamline your finances. This will help you keep track and preserve essential receipts and financial transactions that could help you lower your tax bill and prove eligibility for small business tax credits.
3. Correctly Classify Your Company
If you don’t classify your business correctly, you may end up paying more taxes than you should. Where you classify your business will have a significant impact on your taxes. Below are the main classifications of companies:
- S Corporation
- C Corporation
- Limited Liability Company (LLC)
- Limited Liability Partnership
- Sole Proprietor
- Single Member LLC
When starting your business, remember to consult an experienced business attorney to help you correctly classify your company. You should also consult an attorney if you’re looking to change your company’s classification. This way, you will have expert advice and avoid costly mistakes that could harm your business.
4. Know the Difference Between Gross and Net Income
Knowing the difference between net and gross income is the first step to managing your business finances as an entrepreneur. This can help you make important business choices about your income and when to raise your product prices and other rates. It can also help you determine whether specific expenses are necessary, the type of projects, income streams, and customers you should focus on.
So what is the difference between gross and net income?
5. What Is Gross Income?
Gross income is defined as the total amount of money you earn throughout the year before deducting any business expenses. This amount is the total profit you make from your products and services before removing any deductions, withholdings, and taxes.
To calculate gross income, you have to add all your client billings for the past year. For example, if you have gotten $600 in profits after selling your products to your customers, this amount is gross income.
6. What Is Net Income?
Net income is the amount of money your business earns after deduction of expenses related to the product and other business costs. To calculate your net income, you should take the gross income amount and deduct any business expenses. Such expenses may include:
- Advertising costs
- Tax payments
- Travel expenses
- Professional fees such as legal and accounting services
For example, if your gross income amount is $600 and your expenses amount to $400, then your net income will be $600-$400, which is $200. The net income helps you understand the financial health of your business, while the gross income helps you evaluate your company’s potential.
7. Keep Immaculate Financial Records
The financial records you keep will save you money and the headaches associated with tax filing. Unfortunately, they can also hold you back. Knowing your company’s financial position can help you make informed decisions about certain business issues.
If you don’t know your financial standing, you will make the wrong decisions related to business expenses, hiring new staff members, and outsourcing services. Make sure you log every incoming dollar and other expenses, including cash transactions and payroll expenses. This will help you stay in touch with your business bottom-line.
When applying for tax deductions, you will need proof of the expenses. Keeping a record of all your transactions will make it easier for you to justify your expenses.
Are You Ready to File Your Taxes This Tax Season?
Most business owners are often not concerned about taxes. Knowing when tax season starts is essential for filing your taxes on time. Preparing for the tax season can be time-consuming and stressful, especially if you don’t have a professional accountant to help.
When preparing for tax season, ensure you understand expenses that qualify as deductions, keep a record of your financial transactions and classify your company correctly.
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