Three Tips On How To Stop Hating Tax Time
There are few things that bring a business owner’s blood pressure up like the dreaded thought of Tax Time. Between the stacks upon stacks of receipts to go through, the surprise of what they will owe on Tax Day, and the hours it takes to gather annual income information, it’s just not a fun prospect for most business owners.
But as a certified public accountant (CPA), I know it doesn’t have to be that way. If you are a business owner and can implement the three tips that follow, Tax Time could change from a season of dread to a season of relief and, potentially, of excitement.
1. Keep Up-To-Date Books Throughout The Year
Just like you can’t have sustainable weight loss by eating unhealthy foods all year then starving yourself for two weeks, you can’t possibly expect to sustainably manage the finances of your business by ignoring your books throughout the year then trying to get them all caught up two weeks before the tax deadline.
This matters for a few reasons. First, when you try to do an entire year’s worth of books hurriedly before the deadline, you are going to end up missing some expenses you would have otherwise taken. Every dollar of expense you don’t deduct as a business owner can cost you up to 50 cents in extra taxes on April 15. (That upper figure reflects someone in an average federal plus state tax bracket coupled with self-employment tax.) Not keeping a regular set of books is literally costing you money.
Second, when you regularly update your books, you can use them to make educated financial decisions for your business instead of flying blind. This step is where you transition from someone who just sells a product or service to someone who runs a business that is in the business of selling that product or service.
And if you are like most business owners and doing your books every week sounds like you are signing up for a weekly route canal subscription, then consider hiring someone to do it for you. This will ensure they get done timely and accurately, and you finally won’t be dreading that bookkeeping binge every year.
2. Meet With Your CPA Before Year-End For Tax Planning
Other than the time commitment required and the frustration of going through the books, another major dread of Tax Time for business owners is how much they’ll need to pay when their tax return comes through. On this topic, the main cause of stress comes from the unknown. And it makes sense; if the books aren’t kept up and you don’t even know how much you made, how can you possibly know what you will owe? That is where tax planning comes in.
Assuming your books are current (because you learned Lesson No. 1), you can dramatically reduce the stress of Tax Time by meeting with your CPA before year-end to run numbers and calculate what you will owe for the year. At a bare minimum, this will give you peace of mind because you will have an estimated amount owed and will have four months to prepare — instead of the typical scramble for cash at the eleventh hour. At best, your CPA will give you some action items to implement before year-end that could drop your tax bill significantly, and that makes tax time more exciting indeed.
3. Use A Receipt Tracking App To Replace Your ‘Shoebox Of Death’
The final step any business owner can take is a simple but important one: Take pictures of your receipts. Nobody enjoys spending hours poring through receipts to remember whether a transaction on their bank statement was a business expense or a personal one. With modern technology and smartphones, there is no excuse not to download one of the many receipt tracking apps on the market and take pictures of the receipts as you go.
On top of the hours this will save you in time not spent combing through your Shoebox of Death, it will help you in the case of an audit, as well. How many receipts have you saved, only to have them go through the wash in your pocket three times, or you pull them out months later and they have faded beyond recognition. The good news is, pictures don’t fade. Once you snap that picture of the receipt with your phone and store it on your app, you have that documentation stored for good. So if you do end up getting summoned for an audit, you can impress the auditor with your organizational abilities by providing electronic copies of your receipts. Combine that with your now up-to-date, accurate set of books, and you will command respect from that auditor.
Tax Time does not have to be a massive burden -- as long as you take a few simple steps and act proactively to get your systems in place, it can be incredibly smooth. By keeping a good set of books and planning proactively, you will be able to sleep so much better at night — even during what all those other business owners consider the most frustrating time of year.