The first quarter of the year is typically when tax season preparation heats up for businesses. There is paperwork to be organized, with the goal of creating a return that is accurate and doesn’t hold any financial surprises for your company.
April 15 is approaching quickly, and many day-to-day decisions significantly impact your overall tax obligations. By planning early, your business can stay on top of the paperwork that comes in fast and furious in the early part of the tax year.
Whether you’re preparing to file your 2019 income tax return or you want to plan smart for the current year, here are eight key initiatives worth undertaking now so your team is on top of taxes and has the latest information.
Organize your tax paperwork.
Marc Scott, CPA of California-based M. Scott and Company, said planning heats up in January when companies begin sending out and receiving essential tax documents.
“There’s a lot of tax reporting that goes on in January, so you’re going to be receiving a lot of documentation,” he said. “For most businesses, it makes sense to have the books ready around a similar timeframe.”
If you have a small organization, it’s especially important to get a head start to avoid a last-minute rush. Connecting with your tax professional will also help you get a handle on categorizing the various documentation.
When can I file my taxes?
The IRS announced last year it will begin accepting and processing federal tax returns starting Jan. 27.
You can begin working on your returns as soon as you’d like, whether you are partnering with a tax preparer or doing it yourself with tax software. However, the IRS won’t review and process your return until the official start date.
What do I need to bring to my tax preparer?
If you’re working with a tax preparer, they will need some key documentation. First, they will require proof of your identity. If they are preparing taxes on behalf of your business, you need to provide your Employer Identification Number, also known as a tax ID.
The tax preparer will also need to understand your finances. This includes income from gross receipts from sales or services, sales records, returns, business bank account interest, and other income. It also includes the cost of goods sold such as your inventory, the total dollar amount of beginning inventory, the ending dollar amount of inventory, items removed for personal reasons, and needed materials and supplies. A tax preparer will also require your business expenses, which could qualify you for certain deductions and credits that reduce your overall tax liability.
Understand qualified deductions and credits.
Tax deductions and credits are a critical part of the filing process. For a business, taking advantage of deductions reduces your taxable income, while taking advantage of credits reduces your total tax bill.
There are several business tax credits that are available. The IRS website lists various credits that apply to particular industries, such as for biodiesel use or for offering certain services to employees, e.g., childcare. The number of credits available is extensive, so check with your tax preparer, or if you’re using a tax prep software application, answer questions about your business operations so you don’t miss potential deductions or credits.
Take advantage of the latest tax laws.
The 2017 Tax Cuts and Jobs Act instituted a number of reductions and reforms to the tax code, with many of them impacting businesses. The IRS offers detailed guidance about implementing many aspects of the law, though there are many complexities.
The qualified business income deduction is available to various types of businesses, such as sole proprietors, partnerships, S corporations and their shareholders. According to the IRS, the qualified income must come from a trade or business, and does not include employee wages, capital gains, interest and dividend income.
The instructions list the following parameters:
The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. It’s generally equal to the lesser of:
- 20 percent of their qualified business income plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded partnership income, or;
- 20 percent of taxable income minus net capital gains.
Given the many rules of this particular portion of the tax law, working with a tax professional is recommended so your company is properly taking advantage of the credit.
Itemize business expenses.
According to Scott, having expenses detailed, itemized, and categorized is another way you can greatly save time and hassle before tax day.
Working closely with the bookkeeping and accounting teams (if your business is large enough) or with outside help will please your tax expert and put you in a position to claim the maximum benefit from your expenses.
The IRS also offers a business expenses explainer that details the type of expenses that can be claimed.
Calculate your projected payroll taxes.
Along with expenses and deductions, your payroll taxes should be up to date and calculated throughout the year as part of the estimated tax payment schedule.
Small businesses that could use some additional breathing room in paying their payroll taxes may be able to take advantage of an IRS installment plan, said Jamal Ayyad, vice president of service delivery for SurePayroll.
If you owe less than $25,000 in combined tax, penalties and interest, and filed all required returns, you may be eligible. Visit the IRS website for more details about applying for the payment plan.
Keep up with your home state’s tax issues.
Some states take out loans from the federal government to meet unemployment benefits liabilities. Ayyad noted that if your state has taken, but not repaid those loans, there will be a reduction in the credit against the Federal Unemployment Tax Act tax rate. This means employers in those states have to pay more. A number of states may be affected, including Arizona, Arkansas, California, Connecticut, Delaware, Indiana, Kentucky, New York, North Carolina, Ohio, Rhode Island and South Carolina, as well as the U.S. Virgin Islands.
Most tax professionals will prepare your state return in addition to the federal return. The key, however, is that complexities and changes in state requirements should receive the same type of attention as IRS rules.
Consider an extension.
Like filing your individual return, you can request an extension from the IRS, which gives you an additional six months (until October 15) to file your 2019 taxes.
Use Form 7004 to request an automatic extension. According to Scott, it may be to a business’s advantage to take the additional time. Often there may be clarity needed on a tax issue to ensure you’re in compliance with regulations, or some clients and customers may have been slower in getting your team the right paperwork.
However, the extension only grants you a grace period to file your final return – you still must pay the taxes you believe that you owe. Even if you underpay, by filing an extension, this reduces the amount of money you need to submit when it’s time to file the final return.
Think about succession planning.
What would happen to your business if you had an unexpected health crisis or accident? Business owners should analyze and formulate a plan about what actions need to be taken to ensure the business continues. There are also tax benefits to succession planning, so check with both your attorney and accountant.
Organizing these tax records now makes filing business taxes easier and faster later, said Ayyad. From succession planning to the upcoming year, you’ll reduce stress (for you and your team) by getting these details together now.
“When small business owners get their information together well ahead of time, they greatly improve the odds of filing a complete and accurate return,” he said. “Being compliant is the law, but instead of merely checking taxes off of a list of things to do at the end of the year, a savvy small business owner knows that preparation and planning ahead are key components of success.”
Additional reporting by Chad Brooks and Marci Martin. Some source interviews were conducted for a previous version of this article.