Prepare Now to Make Tax Time Easier
Have you checked your calendar lately? 2020 is finally coming to a close.
Let’s add a little bit of pain to the end of the year by talking about taxes. Small business owners deal with taxes throughout the year. The most significant date is in April when tax returns and final payments are due. But entrepreneurs can make tax time easier by doing a few simple things before the end of the year.
Here are ways you can prepare now to make tax time less stressful.
Run your books year-to-date
It’s important to understand where you stand now, not after the close of the year or when your final 2020 tax payment is due. Knowing where you stand gives you time to prepare and complete any necessary transactions before the calendar year expires.
I like to run my books through the end of November and then sit down with my tax accountant. Whether you use a professional tax preparer or not, it’s smart to look at your year so far and compare it to last year.
Make more money this year than last? Congratulations! Oh, but get ready to pay the IRS more. It’s a good problem to have, but it’s also smart to know that you will owe a bit more in taxes.
After you do your books, you will be prepared to take further steps during 2020 to make tax time much easier in April.
Time to be a big spender?
If your profits are coming in a bit higher than usual, or if you think your tax rate might be lower next year, it might make sense to make some purchases in December.
Some purchases can be expensed right away. Depending on your tax and company situation, you might be able to deduct the cost of expensive equipment the year you purchase it through a Section 179 deduction.
Consider your situation this year compared to previous years, and what you think will happen next year, to decide if you should make that big expenditure this year.
Fix mistaken payments
Business owners know how easy it is to accidentally pull out a business credit card at the grocery store rather than using a personal card. Sometimes it goes the other way — you use your personal credit card for a business expense.
Rather than zeroing these expenses out after the year ends, write a check between accounts to fix any errant expenses before the calendar year ends. This will make your books a lot cleaner.
OK, so you’re supposed to collect W-9s from most contractors before you pay them more than $599 during a calendar year. But life (AKA the million tasks you have to do as a business owner) sometimes gets in the way.
Some contractors are slow to return W-9s, so start asking now.
You need contractors’ W-9 forms in order to issue form 1099 to them. 1099s are due much earlier than tax returns. Companies must file them by the end of January, 2021 for tax year 2020.
Making matters more complicated, tax year 2020 uses a new form to report payments made to non-employees. It’s called the 1099-NEC. While it’s simpler than the old form, it might take some time to familiarize yourself with it.
Check for outstanding payments
Many small businesses use “cash accounting”, which means they only count revenue when they receive the payment. This is a lot simpler than accrual accounting but means that last-minute payments can lead to an unexpected jump in revenue (and the corresponding tax payment).
Prevent these surprises by reaching out to companies that owe your business money to see when they expect to pay their invoices. Be clear with them why you’re asking; explain that you use cash accounting and want to forecast the rest of the year.
Make provisions for your January payment
Many entrepreneurs make quarterly estimated payments throughout the year. Things got a bit wonky in 2020 with taxes and estimated payment deadlines extended due to the pandemic. But your final estimated payment is still due on January 14, 2021.
Make other contributions for 2020
Aside from your business, now is when you should make any end-of-year charitable donations. Also, make sure you’ve contributed to other tax-deductible accounts, such as Health Savings Accounts, if you are eligible. Many of these contributions must be made by December 31.
Make tax time a breeze
April 15 doesn’t have to be a scary date circled in red on your calendar. It’s an easy date if you prepare for tax time accordingly. By preparing before the end of the year, you will be 90% of the way toward completing your tax return. Most importantly, you won’t be hit with surprises.