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Updated Oct 23, 2023

Small Business Tax Tips

Tax season can be complicated, especially for businesses. This advice from tax experts can help make managing your taxes easier.

Sally Herigstad
Sally Herigstad, Business Operations Insider and Senior Writer
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For people running small businesses, taking care of business tax obligations can seem like a daunting task. For many, even when they gather all their records and file a return, they wonder if they did the best they could with their tax situation. 

By taking charge of your planning, recordkeeping and tax preparation process, however, you can greatly reduce tax time stress and feel more confident you have filed correctly and to your best advantage. Check out these tips and see which ones can help you make this part of your small business management run more smoothly.

Tax tips for small business owners

The following tax tips from expert accounts and financial planners can help entrepreneurs and small business owners manage their tax liabilities more effectively.

1. Set up a recordkeeping system early. 

In the rush of starting a new business, setting up a good recordkeeping system can get pushed aside. After all, you’re busy and tax season seems far away. 

As Barbara Anderson, CEO at Foodee, said, “Oftentimes, the administrative or accounting work gets put on hold or delayed so that you can focus on your customers or business. One such thing that gets shuffled to the side is keeping track of receipts or expenses.”

But this is a recipe for disaster. By the time you start preparing for tax season, your tax information should already be together and organized, Anderson said. Consider tracking your income and expenses on your own so you can simply call them up when you need to file your taxes.

“Keeping track of your income and expenses year-round in a software solution is a great way to reduce your headaches at tax time,” said Anderson. “Your info is all there in one place and precategorized, and it can be easily transferred to your tax software.”

If your recordkeeping system consists of stashing receipts in wallets, on the counter or in the car, you’re likely to miss deductions at tax time, which costs you money. It costs you time and frustration when you have to gather them up at tax time. And it costs you money in higher accountant fees if you show up at their office next year with disorganized records for them to sort out. 

Key TakeawayKey takeaway
The best time to set up a recordkeeping system that saves you time and money is at the same time you set up your business. You can always change and adapt your system later, but do yourself a favor and have something in place from day one.

2. Open separate bank accounts for your business.

Most small businesses should have separate accounts for business and personal use. Business accounts appear more professional to clients and customers and are one factor the IRS uses to determine if a business is run for profit rather than as a hobby. If you operate a business with people other than your spouse, separate business accounts can help increase accountability and trust. One of the most important reasons to have separate business accounts is that it makes recordkeeping much simpler. 

“Most of the problems and frustration I see on the part of the small business owner is when he or she has been commingling business and personal funds throughout the year and now has to dig back through bank accounts to straighten things out,” said Helena Swyter, a practicing accountant for creative professionals at SweeterCPA. “It’s important for entrepreneurs to establish a business bank account and to use that account strictly for business transactions. Get in the habit of paying for personal expenses with personal debit or credit cards to avoid extra work at tax time.”

3. Learn about the tax deductions for which you qualify.

Some tax deductions are obvious, but other business tax deductions may surprise you. Tax deductions and other tax perks have changed, and sometimes changed again, during the pandemic. Your tax professional or tax software can help, but you also need to keep up so you know what to ask or what to look for regarding tax laws. 

Not all deductions are represented by a receipt or an entry in your accounting system. For example, the home office deduction can be substantial if you use part of your home to conduct business or store inventory. You generally receive a higher deduction by itemizing your home office expenses rather than taking the simplified deduction. Another easily missed deduction is one for energy-saving expenses. If you insulate your warehouse or make other improvements, you may qualify for tax perks. 

Kristel Yoneda, owner at Ikigai Marketing, thinks that many small business owners are unaware of the different tax deductions available to them. 

“As small business owners, we are responsible for paying a pretty hefty percentage of our earnings toward taxes, but there are also many deductions that can help offset the financial burden,” she said. 

TipTip
Even small, repeat expenditures add up and can make a big difference in the final tax bill for your business. Try to keep up with current tax laws so you don’t miss deductible expenditures that could benefit you.

4. Decide whether to have a professional do your taxes.

Small business owners are divided about whether to do taxes themselves, pay someone in house or hire a tax professional. The best answer? It depends on the complexity of your business and whether you or someone in your company has the time and ability to do the job.

For business owners who want personal help, or who have limited time and attention to devote to taxes, paying a tax professional can be worthwhile. Tax professionals do more than prepare taxes. They can help you plan longer term to maximize profits and lower taxes for years to come. Yoneda personally prefers to let a professional handle her taxes. 

“Filing my taxes used to give me a headache,” said Yoneda, “and I was always afraid of doing the forms incorrectly, so now I just let a tax professional take care of it. This was especially helpful when I moved from Hawaii to California a few years ago and had to register my business in Los Angeles.” Yoneda says this allows her to focus on producing quality work for her clients rather than stressing about her taxes.

Today’s tax software makes it easier than ever for more entrepreneurs to do their own taxes. When you follow the step-by-step process in the program, you are asked basically the same questions a live tax professional would ask. If you still want the reassurance of a live person, or if you want to ask more questions, some tax software programs now offer professional tax advice online for a reasonable fee.

5. Make sure your accounting solution works for you.

It’s absolutely vital that you keep track of income and expenses in an accounting solution throughout the year. The best accounting software offer detailed reports that can make it as simple as running a search to find the data you need.

“This will not only help you stay on top of your business day to day, but it will also make sure tax time is easy and painless,” Anderson said. 

No one accounting solution is best for every business or every business owner. Different solutions offer different benefits. A small business may do very well with a simple solution to track income and expenses.

When you hire employees, however, your needs for an accounting solution change. You need a strong payroll tax component, as well as a solution to help you track employee benefits and other items.

As your business grows, make sure your accounting solution keeps up with your needs. 

Did You Know?Did you know
Accounting solutions are available to use and maintain all year round, not just at tax time. However, if you’re also looking for a tax-specific solution, check out our guide to choosing business tax software.

6. Consider mobile apps to track mileage and other items.

You can still track business mileage on a notebook you store in your glovebox, but that’s not the most efficient method. There are numerous mobile apps that can help you easily track expenses, time, invoices and so on. 

The first place to look for mobile apps is your accounting solution or financial institutions. They may offer free apps you can use on the go to keep track of your expenses and other information.

You can also find apps that use your GPS to track your mileage expense. For example, for $59.99 per year (less if you pay annually), MileIQ automatically tracks your miles so you don’t miss out on valuable deductions.

7. Plan now for your next business tax year.

Without planning, you or your tax professional can only do so much to improve your tax situation. The decisions have been made throughout the year, and any damage has been done. Tax planning should include both better recordkeeping all year and planning your strategy for tax optimization.

Regarding recordkeeping for last year, Yoneda recommends that you reflect on items or issues that made the tax season stressful. 

“Were you unsure of total income? Was it difficult to categorize expenses?” she said. “If so, changing your accounting software or procedures for using it may help you better keep up with recordkeeping this year.”

Tax planning should include estimating your income or loss for the coming year or years and taking steps to minimize your tax load. For example, you may want to consider timing large equipment purchases or other major expenditures to offset higher income years, evaluate retirement plans and their tax benefits, and balance capital gains and losses in years when they best offset each other. If you are not sure how to plan for next year, consult a tax professional. 

8. Evaluate your business organization type.

Having the right business organization type affects many things, including the amount and kind of recordkeeping you are required to do and the amount of tax you pay. For a very simple business, owned and operated by one person, a sole proprietorship is generally all you need. The recordkeeping is less complex than with any other type of organization, and you file a simple schedule with your individual income tax return. Your income is taxed once for federal income tax purposes, as ordinary income.

If you operate a business with other people, you may need to form a partnership, S corporation, C corporation or other type of organization. These organizations require their own tax return filings and are subject to different rules. 

Especially as your business grows, you should make sure you still have the business organization type that works best for you. 

Key TakeawayKey takeaway
Your business organization type affects how much time and money you spend preparing and filing taxes, as well as how much tax you pay.

9. Deal with tax problems promptly.

If you get behind on estimated or payroll tax payments, or get a letter from the IRS indicating a problem with your account, it’s easy to put off resolving the problem. Small business owners are busy running their businesses, and they don’t always have the cash flow to clear an IRS bill right away. Unfortunately, letting a tax problem slide can be a big mistake.

Always face tax problems head on, before they get worse or lead to a tax audit. Reply promptly to any letters you receive. If you can’t pay a balance, pay what you can and work with the IRS on an installment plan, or in the worst-case scenario, an offer in compromise. If you disagree with the IRS, consider getting professional tax counsel. 

Tax management is a vital part of your business

New business owners may consider dealing with taxes to be a once-a-year hassle, or something to be gotten over with so they can get back to running their growing businesses. If they’re paying attention, however, they soon discover that year-round tax planning, recordkeeping and tax preparation are vitally important to running a business and can make the difference between business success and disaster. By following these tips, you can run your business more profitably and rest assured you’re optimizing your tax results.

Sally Herigstad
Sally Herigstad, Business Operations Insider and Senior Writer
Sally Herigstad, an authority on all things finance and taxation, is the author of Help! I Can't Pay My Bills: Surviving a Financial Crisis. As a certified public account, a member of AICPA and a tax software developer, Herigstad has spent decades guiding business owners and others through complex tax laws, debt resolution, financial planning and more. Over the course of her career, Herigstad has served as a subject matter expert for Microsoft's TaxSaver, MSN Money and Microsft Money, and contributed insights and teachings through LendingTree, The Motley Fool, Bankrate, U.S. News & World Report, CreditCards.com, TaxAct and Realtor.com. For CreditCards.com, she spent 10 years helming the "To Her Credit" column, in which she answered reader questions on an assortment of financial matters.
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