When we are deep in tax-related paperwork and spreadsheets, now is the perfect time to think ahead. What can we, as small business owners, do to make this whole process easier next year? And the year after that.
Did you know that self-employed people have a higher than average rate of tax audits? One of the first things I did when I started my own consulting business in 1989 was to meet with an accountant. I wanted to start out with good habits so that my relationship with the IRS would remain a distant one – and I would be fully prepared if that unwanted audit letter were to arrive in the mail.
My accountant gave me several tips that I have faithfully followed ever since:
As a result, I opened a dedicated business checking account and later added a business savings account. With today’s online access, it is easy to meet any cash needs with a quick transfer from savings into checking.
In addition, we use credit cards that are dedicated to business use. When the bill comes, it is paid right out of the checking account. Since my husband and I have more than one business, we tape a small piece of paper with the company initials on the face of each credit card to help insure that we use them appropriately. Otherwise, it is easy to make a mistake by using the incorrect credit card for a purchase, resulting in more paperwork.
I have a rolling file drawer where all of the business receipts and invoices are filed for the current year. There is one file folder for each category of bills paid, and one for each income source. This helps each month as I add more documents – as well as in December and January as I review the status and prepare documents for the accountant.
I do as much preparation and summarization as I can up-front to minimize data-organizing costs from the CPA (i.e., Certified Public Accountant) who fills out our stack of tax forms. (Excel spreadsheets and various bookkeeping packages are excellent for this.) When starting a business, if you find yourself with more time than money, this may be a particularly good trade-off.
Sometimes the simplest changes in procedure can save a lot of time. When using an accounting software package, having the original documents organized nearby is still extremely helpful. Especially if we are audited years later, when we may have forgotten anything not documented!
Even if this type of record-keeping does not come easily, it still needs to be done. Thus, we have to “buck up” or get someone to do it for us with appropriate oversight. Every business owner is responsible for signing tax forms and knowing what is in them, even if someone else prepares them for us. So, take time to understand the numbers, ask questions if necessary, and make sure everything is correct.
Don’t wait until you file – make organizational changes now! Get the benefits this year.
Until we meet again,
The Entrepreneur’s Friend
The Entrepreneur’s Friend® is a registered trademark of Wheaton Consulting Group LLC. Photo credits: All photos were taken by Cynthia Wheaton and owned by Wheaton Consulting Group LLC except as noted. Coffee cup art by Jim Wheaton. Author support: Fellow authors from The Wrinklings and Light of Carolina Christian Writers Group.