At the end of each year, small business owners take a look at the past 365 days. They recount their successes, consider their challenges, and based on those thoughts they look towards the changes they will make to be more successful in the New Year. One thing that will not change is the need to be fiscally healthy in regard to taxes. The end of the year is a fantastic time to examine your finances and there are several great end of year tax preparation tips that will help successfully close out your fiscal year and take advantage of additional deductions. These tips can make a big difference in your tax success and your bottom line.
Know Where You Stand
The first thing you should do is carefully examine your financial records. Make sure your books are totally accurate and completely up to date. Have a clear understanding of how your year went financially. Get to know the numbers and understand their impact. Walk through the breakdowns and know what your cash reserves are.
In order to plan for the future, year-end is a great time to look at all aspects of your business operations. Knowing exactly where you stand is crucial to properly plan for the upcoming year. You should examine things such as your cash flow, health care, retirement, investments, and other important considerations. Check operating agreements, wills, powers of attorney and health care proxies to make sure they are accurate and reflect any desired changes that occurred throughout the year. Review your employer-sponsored programs and take advantage of open enrollment to look at ways you could reduce your taxable income in the upcoming year. Also, make sure to compare standard deductions from itemized deductions to get the largest benefit.
Take Advantage of Deductions
This is important because the end of the year is a great time to spend money on things your business needs. Upgrade your equipment, stock up on office supplies, and make advance payments to your suppliers. The reason this is a good idea at the end of the year is because it provides those purchases for needed supplies and equipment are deductible. Instead of having cash lying around, making improvements and purchases lower your tax responsibility. This is also a great time for businesses that carry an inventory to check the market value. There may be additional deductions if the value of your inventory dropped. This will depend on your accounting method so a tax professional like Landwehr Financial Solutions can help you determine what is best for your situation. Another great way to build those deductions is to start an employee retirement plan or contribute to an existing one. Making charitable contributions or year-end bonuses for your employees are also helpful.
You may also benefit by deferring your income until the New Year. If you are in a position where your end of year income could boost you into the next tax bracket, and if you believe you will be in the same or a lower tax bracket next year, it would be wise to bill in late December. It is likely that payment would not come until the next year. This is useful if you use the cash method of accounting. For businesses that have invested in stocks and mutual funds, the strategy of loss harvesting may also be a good option. Businesses can sell their underperforming stocks and mutual funds to take a loss. Those losses will offset any taxable gains dollar for dollar.
There are many other types of deductions that also should be considered. These deductions include:
- Auto and Transportation Expenses: Using personal vehicles for your business allows you the opportunity to deduct expenses and mileage. The rules for this deduction can be difficult to navigate, but is often well worth the time it takes to learn it.
- Startup Expenses: Consultant fees, advertising expenses, office supplies, utilities, and many other expenses can be used as a deduction. These startup expenses are called capital expenses and up to $5000 can be deducted in the first year your business is in operation.
- Books, Legal Fees, and Professional Expenses: These types of expenses are considered operating expenses. Because of that, they are fully deductible.
- Outstanding Customer Debts: Depending on your type of business and what you provide to customers, bad debts may be deductible. Goods that are not paid for may be deducted, however the time spent on a client in time for services are not considered deductible.
- Interest Charges and Fees: Businesses that use credit to operate will incur interest and other fees over the course of the year. As long as you have carefully detailed records that prove the purchases made on credit were for the business, those fees and interest can be deducted.
There are many other deductions available as well. A professional and experienced tax company will be able to ensure that your business takes advantage of all deductions available to them. The following list of often overlooked business expenses that may be deductible can be helpful to start considering what is available to you.
- Banking Service Fees
- Casualty and Theft Losses
- Online Business Services
- Postage and Shipping
- Trade Shows and Conferences
- Promotional Items
- Petty Cash
- Business Related Publications
- Association Dues
Look Towards the Future
The end of the year is also a phenomenal time to get a head start on your next year’s finances. If you’ve ever experienced that panicked rush when the time comes to close out your books, you can understand why planning ahead would be helpful. Create a system for your financial record keeping that you can use to eliminate the frantic search for data and make the process nice and easy in the coming year. Also, take the time to project your income. Your earnings over the New Year will determine what amount of tax you have to pay. While all business owners would like to have as much income as possible, when it comes time to pay the tax on those earnings, you can be startled at the amount you owe. By projecting the income you expect to have in the next year, you can better plan for tax time and that shocking return will not be such an unwelcomed surprise.
Seek Professional Help from Landwehr Financial
Attempting to do your own year-end accounting and tax preparation can be tempting. There are numerous online tools and software that are cheap and promise great results. In reality, the tax implications for a small business are far more complicated than these options make it sound. The IRS determined through a study that the average business owner spends more than 16 hours preparing their own taxes. Those 16 hours are often filled with headaches and confusion. In addition to the time commitment, business owners often will miss deductions that a professional tax preparer would not. Using a professional can easily save more than the investment you make to partner with one.
The professionals at Landwehr Financial Services can be a great help in navigating the end of tax-year considerations. Our holistic approach ensures that we will take the time needed to truly understand your situation and make your accounting concerns disappear. Contact us today to learn more about our services and experience first-hand the level of care we give to all our clients in the St. Cloud MN area. We are happy to discuss your tax needs, as well as any other accounting services you require.