Eight ways to prepare your small business for tax season

January through April can feel like an all-out scramble to collect and track down information for your CPA. But it doesn’t have to be. You can start chipping away at your to-do list now to make the new year a time for tackling new goals instead of tax panic. Prepare for tax season now by getting these things in order before the end of the year. 

1. Get current on your bookkeeping

The biggest task you’ll be facing to prepare for tax season is making sure your books are up to date. It can be much too easy to let things slide during the year and your books may reflect that. Start by reviewing all your transactions and reconciling them. Record any additional transactions you may be missing in your books as well (like anything purchased or sold in cash). From there take a look at your accounts receivable and accounts payable. Do you have any outstanding bills to pay? What’s the status of your invoices? Are your clients current? Now is the time to track down late-paying clients before the end of the year

2. Prep for your CPA

Reports to Run

When you want to prepare for tax season, you’ll need to know how to run reports for your accountant. Your CPA may request the following reports after the end of the year: 

  • Balance Sheet: Your balance sheet shows your assets and liabilities at a certain point in time. You don’t have to run the report yet, but make sure you know how to find and print this information. 
  • Profit and Loss (P&L) Statement: Your P&L statement shows your expenditures, income, and profitability over a period of time (i.e. the past year). This can show the financial strength of your company. 
  • Trial balance: In double-entry bookkeeping, a trial balance shows all of your business credits and debits. If your books are truly balanced, the ending balance will be zero. 

As you learn more about accounting and bookkeeping for your business, you can also use these reports to understand the financial health of your business. You can spot trends and spending patterns that affect your overall profitability. 

Track Business Deductions

Additionally, you’ll want to have a list of your business tax deductions listed with the necessary records (receipts). Business-related expenses can include:

  • Monthly subscriptions for software
  • Payment collection fees
  • Mileage and travel expenses
  • Equipment purchases
  • Office supplies
  • Office space
  • Cell phone/internet bills
  • Payroll taxes

If you are unsure if something is a tax-deductible expense, record it and ask your accountant to review it. You can give your CPA this information in a spreadsheet or something similar. Gather all your physical and digital receipts in an orderly manner well. 

Assess Your Bookkeeping System

While you prepare for tax season, it may be a great time to evaluate if your business is best served by using cash basis or accrual accounting. Cash basis accounting is very straightforward for very small businesses or single-person entities, but accrual accounting can give you a clearer picture of your business’ performance month-by-month. Talk to your CPA about what system is best for you. Learn more about cash basis vs. accrual accounting here. 

1099 forms to prepare for tax season

3. Track down 1099s

If you are a freelancer or independent contractor, you’ll expect to receive 1099s tax forms from any client that paid you >$600 in the last year. Once your bookkeeping is up-to-date you should be able to see which clients should send you a 1099. Some clients may need a reminder, especially if the work was done early in the year. After the first of the year, you could send out a thank you email for last year’s opportunity and a kind reminder to send a 1099 along at their earliest convenience. The last date for them to send them out is usually mid-February. 

What if they don’t send a 1099? 

Don’t panic. Just because a client doesn’t send a 1099 does not mean you can’t properly file taxes. You will still report your income.  

4. Make office repairs/improvements

Whether it’s a home office upgrade or brick-and-mortar makeover, your home office expenses are tax deductible. This makes the end of the year a great time to knock out those long-awaited updates and repairs. 

5. Consider incorporating

While you prepare for tax season, consider if your business is well-suited for incorporating. Your sole proprietorship may be ready to swap to an LLC, S-Corp, or C-Corp. You have until the end of the first quarter to decide which is best for you, but start looking at your options now. Your CPA can provide you with some counsel which is best for you. Incorporating can not only protect your personal assets, but provide you with better tax breaks, especially as your business continues to grow. If you are planning to hire help in the next year, you’ll want to incorporate your business. Depending on your industry, incorporating may also improve the legitimacy of your company to your potential clients and customers. 

A couple working on their business taxes

6. Take advantage of business deductions

If you have been waiting to purchase a new computer or invest in more inventory, the end of the year could be a great time to do just that. Making business-related purchases can reduce your tax bill for the next year. You could also use this time to purchase annual subscriptions to your must-have software or coaching services. 

7. Review bad debt deductions

Sometimes, despite all your hard work, you may come across situations where clients refuse to pay or ghost you when it comes time to collect payment. If you start preparing for tax season and you still have unpaid invoices, you may be able to write off the amount as a bad debt deduction. 

What are bad debt deductions?

Bad deductions are when you are unable to collect an invoice for goods or services that have already been given. While every effort should be made to collect unpaid invoices, you can write off bad debt as a tax deduction. 

The debt needs to qualify as bad debt before you can write it off. You need a history of your attempts to collect on the invoice and the client’s response (or non-response). Then check out our guide for how to write a demand for payment letter. If you still find yourself in a circumstance where there is no possibility of collecting payment, talk to your CPA about writing off the amount as a bad debt deduction. 

8. Outline goals for next year

While preparing for tax season may not be your favorite task, it can help determine the future of your business. You can gain valuable insight on:

  • What goods/services are making you the most money
  • What clients are most consistent and worth investing more in
  • What times of year you are most busy/least busy
  • How you can budget your resources for next year
  • If you are able to expand your business
  • If you are able to hire help/employees

Use the information you’ve collected preparing for tax season as a reference point for next year’s goals. When used in tandem, your financial reports and big-picture goals can help you map out a successful plan for the upcoming year. 

A woman wearing glasses works at her laptop near a bright window

The Best Thing You Can Do to Prepare for Tax Season

Tax season will always be easier when you are up-to-date on your bookkeeping. If you are struggling to stay current with your books, it may be time to hire help. You can outsource your bookkeeping to the bookkeeping pros at LessAccounting. They specialize in helping busy solopreneurs and small business owners succeed with streamlined bookkeeping that keeps business running smoothly. 

Learn more about our bookkeeping services here. 

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