Repost: Authored by Kevin Miller, CMO at Neat
Unless an extension has been filed, most small businesses have finally made it through another hectic tax season. While there is a sense of relief for all small businesses, many owners and managers barely made it past the Tax Day finish line because they had to frantically collect expense receipts, customer invoices and other important business documents for the IRS. Those small businesses that were subject to a frenzied tax prep process should immediately take steps to avoid the same mistakes in 2019.
Complicating the process even more is the new tax act recently introduced by the government. Luckily, it is generally viewed as a win for most small businesses, but that does not mean there are not certain tweaks owners need to know in order to maximize deductions while staying compliant with IRS policies.
For a better, more organized 2019 Tax Day, small businesses should consider an efficient and organized process in 2018. A couple of steps that small businesses should incorporate into their everyday workflows throughout this year include:
1. Research the new tax act to find out how it will affect your business.
There are various tweaks to the new act that may alter the way you do business. For example, the newly introduced “Qualified Business Income Deduction” may affect your decision to hire W-2 employees versus 1099’s. The deduction only applies to pass through entities, like sole proprietorships, S-corporations and partnerships, and is limited to the lesser of:
20% of qualified business income, or
50% of the total W-2 wages paid by the business
That means a business that employs a lot of 1099’s would have a small W-2 limitation, and in-turn, a small deduction. While there are other factors specific to the Qualified Business Income Deduction, it is these type of changes that small businesses need to familiarize themselves with.
2. Collect and digitally store all business receipts and invoices as soon as you get your hands on them.
In order to maximize deductions, small businesses need to hold onto all their tax-related business documents – not just expense receipts, but also customer invoices, debt collections and vendor accounts. Modern mobile apps and business software also make it easier than ever to simply upload the most important information from those business documents to the cloud, where it is always accessible. By simply snapping a photo of the document with a mobile phone, a business can digitally save the document while staying compliant with the IRS.
3. Keep business and personal accounts separate.
For many entrepreneurs, especially when they are just starting their small business, it may be easy to pay for personal expenses out of a businesses account, but that could be detrimental in the long run. By sharing an account, the owner could be held personally liable for any debt or actions.
4. Do not go at it alone.
Entrepreneurs did not likely get into their business because they had a passion for bookkeeping or tax filling, so it is important they rely on professionals who have expertise in those fields. A bookkeeper or accountant not only makes sure that the business is compliant throughout all facets of the tax prep process but can also suggest new processes that maximize returns.
For a less stressful tax season next year, it is important that small businesses implement a day-to-day process now, so they can avoid scrambling next spring. Small businesses that continuously address tax pain points throughout the year will not only avoid a dreaded IRS audit, but also maximize their deductions, which will ultimately lead to more money for the business.