By Mark Landiak
January 9, 2015 – Tax season can be intimidating. Small business owners can particularly experience a range of emotions, from fear of not being in compliance to frustration with the seemingly burdensome tax structure for small businesses.
As a business grows, so does its tax obligation. With the process becoming increasingly complex, it's no wonder why tax season is so stressful. There is much more than just money on the line. Business owners are staking their livelihoods.
Fortunately, the stress of tax season can be mitigated with the proper preparation. This includes an accounting structures that makes sense for your business and thorough documentation procedures. Putting these structures in place (making sure you have a business plan and understanding the pivotal importance of the balance sheet and profit-and-loss statement) are the keys to avoiding the dreaded call or visit from the IRS. Here are some key points to keep in mind:
Understand how your business model affects your taxes. Your company's tax obligation relies largely on your business model. Whether it be a sole proprietorship, partnership, or corporation, each model presents its own set of inherent advantages and disadvantages. As important as it is for your business to pick the most appropriate model, it is ultimately just as important (for tax purposes) to operate solely within that model's prescriptions. As CPA Dino Marnell says, “you have to look and smell like the business you say you are.” Don't give the IRS a reason to audit.
Don't just ask a lot of questions; ask the right ones. Start generally with your questions and gradually get more specific as the process moves along. Be comprehensive. Do I have payroll taxes on all employees? Are there special requirements? Are there unemployment issues to consider? What are the federal and state withholding requirements? Are there penalties? Am I paying myself wages? Finally, how do I know whether or not I'm in compliance?
Know your boundaries; know your deadlines. You need a timetable. You need to understand what your tax window looks like and what pitfalls potentially await. As Dino Marnell points out, “These requirements and deadlines often vary by state and local specs.” Talk to your accountant and map it out. They'll tell you what you need and when you need it. Acknowledging when and where extensions are available is important, but you should never rely on using it. Marnell also points out the importance of defining and maintaining a clear separation between personal and business accounts. The murkier your taxes, the more risks you incur.
Keep records, keep current. A basic set of financial statements should include a clear and accurate general ledger (with the company checkbook), a payroll journal/earnings report, a balance sheet, a profit & loss statement, and a cash flow statement. The more immediacy you devote to accounting practices, the more reward you will reap from that preparation come tax time. As a small business owner, you shouldalways, always, always know where your business stands when it comes to reconciling the books.
At tax time, your small business will get out what you put in as an owner. The proper preparation and anticipation are tremendous advantages because they position your business to move forward. What does that mean? It means you get to focus on making more money for your business rather than losing it to the tax man.
For more information on small business best practices and small business tax consultation, you can contact the following:
Corporate Dynamics Inc.
4320 Winfield Rd. Suite 200
Warrenville, IL 60555
Marnell Financial Services
7575 Ferry Road, Suite 100
Warrenville, IL 60555