Year-end Tips to Help Prepare You for Tax Season
Even though tax season does not officially begin until next year, it is in your best interest to begin preparing your next income tax return as soon as possible. Here are some year-end tips to help prepare you for tax season if you want to end the year on a tax-based high note.
Catch up on your previous quarters’ financials.
The third quarter of 2022 ended on September 30, and businesses everywhere are nearing the end of the financial year. As a result, now is an excellent time to update your forecast for the fourth quarter.
If your small business has been in operation for a while, you should have a good idea of how it performs in the final few months of the year. Christina Armstrong, Tax Manager at NextGen, says knowing your business is key to putting together an accurate projection. “You need to be able to see where you think the business will end up in the fourth quarter of 2022,” she says. “Whether you plan to grow or anticipate a downturn is entirely dependent on the entire year and your business cycle.”
Because most small businesses pay estimated taxes based on the previous year’s figures, you should compare the last three quarters to last year. The estimated tax payment method allows small business owners to keep track of their expenses in the run-up to tax filing in April and offset any costs that occur between this period and their final submission to the IRS.
If your estimated income taxes were close, you can use that information to decide whether you need to increase your tax payments due to an increase in income or save money for when you file your tax return.
Consider making large year-end investments.
When it comes to filing taxes, deductions are your friend.
One way you can increase your tax deductions is by making upgrades or capital improvements near the end of the year. Businesses should consider purchasing new equipment or certain other business property that will qualify for a Section 179 deduction. Under that deduction, small business owners can seek out deductions for all or part of the cost of certain qualifying property in the year they put that item into service.
For example, if you were waiting to buy that new computer system, you may want to buy it now and put it in service this year so that you can write it all off and reduce your overall taxable income. But make sure the purchase makes sense in the short term! When considering year-end investments, you only want to make investments that will improve the profitability of the business.
Check your retirement plan.
Perks are extremely effective ways of attracting and retaining new employees. While many small businesses offer unusual perks to entice customers, the tried-and-true benefit of retirement plans remains a significant benefit to employees.
As you prepare your taxes, you may want to look at your retirement offerings. Small businesses have access to specially qualified retirement plans outside of the typical 401(k) or IRA. Simplified Employee Pension Plan (SEP) programs can help you put away up to 25% of your income (up to $54,000).
Check for obsolete inventory or uncollectable debts.
Running a business involves some risk, and some items simply do not sell, and some debts cannot be collected. While neither situation is ideal for any business, the losses are deductible in both cases.
Old inventory, or inventory that can no longer be sold, is deductible as an expense come tax time. Since inventory only gets expensed when it’s sold, you can get rid of the items that can’t be sold and deduct what you originally paid for them.
The same idea applies to uncollected debt, though what constitutes an uncollectable debt varies depending on your business model. In either case, you’ll need proper documentation for proof.
Remember cash-based businesses can be more flexible.
If you operate a cash-based business, you should think about how you report your income and expenses at the end of the year. Cash-based businesses must only record income and expenses as they are received or spent. With that in mind, you might want to reconsider how you send and receive payments as the year comes to a close. Depending on how you handle your year-end cash flow, you can essentially accelerate your expenses while deferring your income.
That means if it’s nearing the end of December, you can potentially defer the receipt of a check until the following year. The same goes for expenses. If you write a check and it doesn’t get cashed until the next year, it’s still an expense in the current year.”
Donate to charity.
Many businesses give a portion of their profits to charity. Charitable donations are not just a noble and important act, they can help reduce your taxable income. You can improve the finances of your small business by donating to charity. And, while money is always a welcome donation, items such as clothing, shoes, and toys can also help. Keep receipts and other supporting documentation as proof of your donations.
Defer income.
Depending on how much income you earn during the holiday season, you may want to consider deferring that income to the following year to save taxes. Income earned on December 31 is credited to the previous year’s taxes, whereas income earned on January 1 is credited to the current year’s taxes. Consult with an accountant or tax professional first, as it may not make a significant difference.
Accelerate expenses.
Think of accelerating expenses as the reverse of deferring income. Instead of deferring payments, though, you spend money upfront on certain expenses so you can earn a tax deduction in the current tax year, rather than the following tax year. Accelerating expenses only makes sense in certain scenarios. Check with a tax professional to see if this strategy is right for your business.
File end-of-year tax forms.
While tax forms for your business’s income and operation aren’t due until mid-April, you likely need to submit important forms related to your business and its employees by the end of the year. These forms include:
- Form W-2: This form reports wages your business has paid to its employees, and the taxes withheld from those wages. While this form has more relevance to the personal income tax levels of your employees, it’s still your business’s responsibility to file them with the Social Security Administration.
- Form 1096: If your company employed contract workers during the year, you’ll have to submit 1096s. These forms function in a similar capacity to W-3s, only they’re applicable to independent contractors who receive 1099s.
- Form 941: This form is used to account for taxes paid to programs like Social Security, Medicare and income taxes.
- Form 940: This form covers Federal Unemployment Tax (FUTA), which accounts for taxes businesses have to pay for unemployment compensation.
- Form 1095c: If your small business provides health insurance to its employees, you’ll have to file this form. These forms address which employees received coverage and can be used to determine eligibility for tax credits.
Hire a small business tax professional.
Thanks to advances in accounting software, it’s easier than ever to do your own personal taxes. For a small business owner, however, it might be better to have a tax expert prepare your taxes. While these tips are a good starting point, it’s not a substitution for working with an experienced tax professional.
American tax law is incredibly complex. While failing to properly file your income or payroll taxes as an individual can become an untenable tax situation, it can spell doom for your small business. Falling behind with your business taxes can lead to tax liens or levies, wage garnishment and the end of your company altogether. You’re definitely less likely to get in trouble by doing something by mistake if you hire NextGen. Click or call for a free consultation.