For startup founders, tax season is easily the most dreaded time of year, and they’re not the only ones who think so. According to a study conducted by SCORE, a whopping 40 percent of business owners consider bookkeeping and tax preparation among the worst parts of being a small business owner. Not only does it take a great deal of time, but the complexities of U.S. tax law can make the process incredibly stressful for first-time filers. However, tax season doesn’t have to keep you up at night and it certainly doesn’t have to distract you from actually running your business.
In fact, if you have the right plan and you know which deductions to claim, tax season may end up being a whole lot easier than you expected.
Get organized
When most people think tax season, they generally think of early April. However, preparing to file your taxes is something that you should think about all year long. Part of this means keeping ongoing records of your expenses and the deductions that you plan to claim. By keeping regular and accurate records of asset purchases throughout the year, it will be much easier to maximize allowable deductions when tax time rolls around. The same goes for employee and contractor tax information. The more information you have on hand, the easier it will be to issue 1099s and W2s.
The same goes for keeping track of upcoming deadlines. Remember, not all startups file on the same day and deadlines can vary based on your business structure. Therefore, it’s important to research and take note of the tax deadlines for your startup. This exercise will give you a better idea of your tax timeline so you don’t end up scrambling to complete things at the last minute.
Related: 6 Tax Forms That are Essential for New Businesses
Get your bookkeeping in order
In the early stages of starting a business, many entrepreneurs opt for the DIY bookkeeping approach. The problem is, bookkeeping is a much more time-consuming and complicated task than most founders realize. As a result, falling behind on the books is not uncommon. Of course, you can’t file your taxes if your books aren’t up to date.
In the case that your books aren’t tax-ready, you will need to take some important steps to rectify the situation:
Properly categorize your business transactions
One of the biggest (and costliest) mistakes that startup founders make is miscategorizing business expenses. This means not just recording your business transactions accurately, but also making sure that things are categorized consistently. Properly categorizing expenses will help to keep your books more organized in the long run and can also help you avoid increased scrutiny from the IRS.
Balance the books
Balancing the books is part of bookkeeping 101. Essentially, it means bringing the totals of your debit and credit into agreement. If you’re using accounting software to do your bookkeeping, this will be done automatically. However, if your bookkeeping is done on paper or in Excel, you’ll need to balance the books yourself.
Reconcile your bank accounts
Another part of getting your books in order is reconciling your bank accounts. This involves carefully combing through your financial transactions to make sure that the numbers you’ve recorded match those in your bank account. This is also the time to ensure that your personal and business expenses aren’t mixed up in one account—a common mistake that could land you in hot water with the IRS.
Prepare all your reporting and bookkeeping documents
Once you’ve gone through your books with a fine-tooth comb, you’ll want to collect all the necessary bookkeeping records, including journal entries, profit and loss statements, and your balance sheet. Having these documents in one place will make your life a whole lot easier when you or your accountant goes to file your taxes.
Fortunately, if you’re working with a bookkeeping service, these kinds of financial reports are prepared for you and delivered to you throughout the year. However, if you’ve been using the DIY approach, you’ll need to prepare these key documents by printing out copies of the records or digitizing the records to send to your accountant.
Maximize your tax deductions
As mentioned above, part of getting organized means thinking about the business deductions you can claim. This is particularly important when running a startup, as you need to save every penny you can. Luckily, there are a number of tax deductions that startups can take advantage of.
While the general rule is that deductions apply to anything ordinary and necessary for running your business, there are a few specific deductions that startups will want to look out for.
- Startup costs: Startup costs are the investments you made to physically start or open your business. This tax deduction must be claimed the year that your business opens.
- The Research and Development Tax Credit: The R&D tax credit helps to offset some of the labor costs involved in the research and development for your startup.
- Bonus Depreciation and Section 179 Depreciation: Depreciation refers to writing off the cost of large purchases or investments in regular amounts over a number of years. There are some incentives for small businesses that allow you to claim a larger percentage of, or all of, the costs in the first year.
- Professional fees: In most cases, the cost of consulting with professionals, such as accountants or lawyers, can be deducted.
- Office expenses: There are a number of tax deductions for expenses related to the physical cost of running an office or home office, but note, there are particulars to what constitutes a home office.
- Employee expenses: If you have hired employees, you might be able to deduct the costs of payroll taxes, savings plans and insurance contributions.
- Software subscription fees: The costs of subscription fees for cloud-based software are usually tax deductible.
- Travel: Whether it’s an international trip or miles driven in your car, most business travel is considered tax deductible.
- Marketing and advertising: Costs associated with the marketing or advertising of your business, such as creating a website or printing brochures, is deductible.
- Banking and lending fees: The cost of wire transfers or other banking fees can be deducted.
Collect the necessary receipts
No matter what kind of startup you run, tax time is synonymous with the collection of receipts. This is because if you are audited, you’ll need receipts to show proof of all those juicy startup deductions to the IRS. Remember, a deductible expense is only good if you can actually prove that you spent money on what you said you did, so careful record-keeping is necessary to back up those claims.
Of course, the process of collecting receipts shouldn’t lead to you carrying around an overstuffed shoebox. Make things a little easier for yourself by scanning and uploading copies of your receipts to the cloud. You can even use dedicated apps to transcribe the information from each receipt for you. Remember, you need to keep receipts that support business expenses for a minimum of six years from the date you filed your return, and this is next to impossible with the shoebox method. By digitizing your receipts, you can save space and keep paper files to a minimum.
Sign Up: Receive the StartupNation newsletter!
Set aside money for taxes
Though most founders know that they need to set aside money for the government, many are still surprised when tax time rolls around. The best way to prepare for the inevitable is to simply set aside money in advance. While the exact amount you should save is subject to some debate, setting aside approximately 30 percent of what you earn will often cover both federal and state taxes. Even if you don’t end up owing this much in taxes, it’s always better to set aside more money than less.
Talk to a professional
After taking the above steps, you’ll be in good shape for tax season. However, this doesn’t mean you should go ahead and file right away. Tax rules and regulations change frequently and tax reforms such as the Tax Cuts and Jobs Act (TCJA) may affect what you owe.
To ensure that you’re paying exactly what you should be paying, it’s important to consult a professional. Whether it’s a bookkeeping firm or an accountant who specializes in tax preparation, it never hurts to get an expert opinion. This is especially important if you’ve been using a DIY approach and want to make sure you don’t end up on the other end of an audit. Not to mention, accounting professionals who are familiar with the intricacies of tax planning and preparing for startups will likely be able to identify deductions you may have missed, helping save you some serious money in the long run.
