Tax season is no one’s favorite time of the year. On top of the usual challenges of running a business, you need to hunt down a significant amount of information spanning the previous year and dedicate time to file your taxes accurately.
However, it doesn’t have to be a big, stressful ordeal. By following bookkeeping best practices throughout the year, you can take the pain out of tax season, simplifying the process for everyone involved. Plus, you don’t need to hire a bookkeeper to learn the tricks of their trade. Learning bookkeeping tips yourself means you can develop healthy financial processes and simplify tax filings.
Listed below are four bookkeeping tips to get through tax season:
- Maintain good records
Our first tip sounds simple, but it is vital to maintain accurate financial records that are as close to real-time as possible. The longer you wait to record transactions, the more likely mistakes or errors will creep in.
If you pay your vendors with a credit card, make a record of who was paid and what you received.
If an employee pays for expenses using petty cash, get a receipt, and make a note.
Settle up your sales, ideally at the end of each day.
Without accurate records of your transactions, you might misrepresent your finances when it comes to tax season. This could lead to consequences if you are audited, but it could also lead to you overpaying and missing out on tax deductions.
The simplest way to record all this data is through accounting software connected to your bank feed. Modern online accounting software simplifies bookkeeping, creating an instantaneous record of your cash flow.
- Go paperless
Accounting software also helps businesses move away from paper records that are easy to lose and hard to send to other stakeholders. Paper creates time-consuming, manual processes while also increasing the likelihood of human error. Whether it’s receipts, invoices, purchase orders, bank documents, financial reports, or a handwritten ledger, you should no longer be storing critical business information on paper.
Online tools now let you store all this documentation in an easy-to-access, secure data store. That means all your documentation will be in a single location, making it easier to search and tag files, harder to lose or destroy digitally backed-up records, and allowing you to instantly share details with all the relevant parties.
You may have a few clients or vendors still clinging to paper invoices, preventing you from going completely paperless. You can still photograph and upload their documentation if a little nudge or suggestion doesn’t get them to change their minds. With some manual data entry, you can create a comprehensive digital record of your business transactions.
- Never mix business and personal finances
As a small business owner, it can be easy to mix your personal and business finances. Whether intentional or accidental, crossing the streams can lead to significant headaches during tax season and the day-to-day operations of your business.
When it comes to tax season, you’ll have to search through your personal transactions to find any that are relevant to your business. During this process, you will inevitably miss something that could lead to problems with the tax authorities. You may even accidentally commit tax fraud by falsely claiming personal expenses on your return.
Even if you’re a sole trader with no employees and payroll to consider, you should take the time to open a separate checking account and credit card to create a boundary between personal and business transactions.
- Track deductions and tax breaks
No one wants to pay more tax than they need to. Therefore, you should maintain an itemized list of deductions throughout the year. Don’t wait until tax season and then comb through your spending to see what you can claim. Take the time to learn what you can deduct and what you can’t. Then, add each eligible transaction to your itemized list.
Common deductions and tax breaks small businesses can claim include:
- Business expenses: Office supplies, rent, utilities, work-related travel – any necessary expenditure to run your business is deductible at the end of the tax year.
- Retirement plans: Contributing to a qualified retirement plan, 401(k) or IRA, is tax deductible.
- Health insurance: As a self-employed person, your health insurance premiums may be deductible from your taxable income.
- Home office deduction: Working from home makes you eligible for certain deductions. Using your home as a place of work means you can claim a percentage of rent and utilities as expenses.
Simplify tax season by being prepared
Tax season is only made worse by procrastinating throughout the year and leaving it all until the last minute. Preparing for tax season is much easier when it becomes a part of standard business practices. By taking a little bit of time out of your schedule to do your bookkeeping due diligence throughout the year, you can make tax season a breeze.
With simple strategies in place, you’ll save time, reduce the risk of mistakes, and ensure you take advantage of all possible deductions and tax breaks. Plus, with fast access to all of your financial information, you can make better decisions for your business moving forward and maybe even increase the likelihood of being approved for new lines of credit and loans.
However, if all this sounds too complicated or time-consuming, you can always hire a bookkeeper. A freelance bookkeeper can help navigate the financial side of the business, tracking and categorizing expenses and creating financial reports to prepare for filing your taxes come January.
