May 10, 2023
By Jennifer Galstad-Lee, Senior Manager, Tax Services
Small business owners have double-duty during tax season – preparing and filing their own taxes as well as taxes for their small business. With so many demands on their time already, tax season can be cause for dread, but advance planning and organization can make life a little easier. Here are some best practices I advise my clients.
1. Separate business finances from personal finances.
This is one of the most common issues CPAs encounter during the tax time. Business owners who pay for business expenses with personal funds can lose track of the transactions, resulting in lost audit trails and lost deductions. Do not let this happen to you.
Always keep a separate bank account, credit cards, and lines of credit for your business and do not access these accounts for personal use. Commingling funds will not only make accounting more burdensome, costly, and difficult at tax time, but it can also flag your business for greater scrutiny in an IRS examination.
2. Keep your “Books” clean.
In the world of accounting, a “book” means a set of bookkeeping transactions, such as cash receipts and disbursements, credit card purchases and payments, or loan proceeds and repayments. Books are usually grouped by the type of transaction and compiled under each account in the business’s chart of accounts. Businesses should record their transactions correctly and accurately on an ongoing basis – not all at once at tax time. Keeping your books up to date also gives you real-time insight into your company’s profitability and other key performance indicators. Disorganized accounting records that are left out of the business’s comprehensive accounting records could result in costly mistakes.
3. Save for Taxes.
Small businesses are often structured as a single member LLC, an S corporation, or a partnership. This type of business structure is called a pass-through entity, meaning all of the business income and tax items are passed to the business owner or investors.
There are two important due dates for small business tax payments – April 15, and December 31. On April 15, payments are due for both prior year’s taxes as well as the first quarter estimated tax payment for the current year.
December 31 is important because a pass-through entity would have to plan on the 4th quarter estimated tax payment for its individual owner, plus any year-end resolution that requires cash. For example, you may be planning to make a substantial charitable contribution for year-end tax purposes, and that needs to happen by December 31st.
Remember to save in the Spring and Fall, so you can adequately prepare for required tax payments without jeopardizing business cash flows.
4. Don’t forget to save for your retirement!
Many small businesses overlook the importance of a retirement plan, and 30% of Americans between age 45 and above have no retirement savings at all, according to PWC Market Research Center and US Federal Reserve data. Small business owners often find it difficult to save for retirement due to limited resources, relatively high administrative costs, complexity in managing a group retirement plans, or simply because they are too busy operating day to day business.
Despite the expense, commitment to a retirement savings is critical. Among many options, consider maximizing a profit-sharing plan (often part of the business 401(k) plan) or making employer matching contributions to a group retirement plan, which also provides a tax deduction for the business. There are also a number of state-sponsored retirement plans now available.
5. Build your team of experts.
Most small business owners do not have the capacity to be an expert in everything, especially accounting and taxes. It is vitally important to establish your circle of advisors on those areas. Please network and meet others to start building your own team of experts from the beginning of your business. This way you can build a good pool of experts who understand your business well and have relationship with you.
GRF Can Help
Feel free to contact a member of the GRF Tax Team to discuss your small business tax challenges, or reach out to me at the information below.