For a new small business owner, navigating tax season can feel like walking through a minefield. Make a mistake and the consequences can be severe, the pressure is on, and so you get overwhelmed. But it doesn't have to be so stressful.
With the right knowledge and preparation, you can confidently sail through tax season — minus the stress.
Let’s get you what you need to get your business ready for tax season. From tax planning and preparation to deductions and tracking expenses, we cover everything here. Plus, insights on small business taxes, tax filing deadlines, estimated tax payments, and tax software. We'll even spotlight key IRS forms and publications around tax record keeping, compliance, and audit defense The goal — give you a crystal-clear understanding of what to do this tax season and how to minimize your tax liability.
Let’s get started.
Keeping track of the money your business spends is an essential element of tax preparation as well as managing your finances. Besides keeping your books organized, it ensures that you never miss a tax deduction. Here are some tips to help you track and organize business expenses:
Life and work. Personal and business. The lines get blurry sometimes, and that’s trouble. To avoid confusion and stress during tax season, it’s crucial to keep your business and personal expenses separate. This means using separate bank accounts and credit cards for your business, so it’s easier to track your expenses for the business throughout the year.
Build a habit of saving all your business receipts and invoices. This is key to accurate record-keeping, tax compliance, and financial analysis. Such receipts and invoices may involve expenses on office supplies, equipment, rent, business utilities, etc. Store physical copies if you want, but we recommend that you scan and save receipts and invoices digitally for efficiency.
You can do it manually, too, but time is a luxury and you’ll be stretched thin. Modern accounting software makes it easier to track and organize your business expenses across multiple bank accounts. Bookkeeping, expense tracking, even tax optimization and filing — platforms like Fincent help you beat tax season blues.
Not so confident in your accounting/bookkeeping skills? Consider hiring an expert bookkeeper to tidy up your books, track your expenses, and ensure that you never miss a tax deduction. Like Fincent, where you get a personal bookkeeper doing all the heavy lifting for you — catching you up on overdue books, organizing your transactions, reconciling accounts, preparing tax reports and highlighting what you need to review each week.
Make it a point to review your business expenses regularly. This helps you ensure that you’re organized and proactive in managing your business finances. Reviewing your expenses also allows you to identify areas where you may be overspending or where you can invest more strategically to grow your business. It can help you identify deductions that you may have overlooked or forgotten about. For example, expenses such as office supplies, business travel, and equipment purchases often go overlooked despite their tax saving capability.
For efficient tax planning and preparation, the friendly folks at the IRS recommend keeping all business-related receipts and records for at least three years. This includes receipts, invoices, bank statements, and any other financial documents related to your business stretching back to those pre-COVID days.
Failing to file your taxes or failing to pay can result in hefty penalties, interest, and legal action from the IRS (not so friendly anymore, sorry). Which is why it’s important to know your tax deadlines and make “estimated tax” payments (quarterly payments made to the IRS by self-employed individuals and businesses).
A little preparation helps you avoid penalties, live stress-free and stay on top of your finances. Here is what you need to know:
- Estimate your taxable income: Calculate your estimated taxable income for the year, including any deductions and credits.
- Use Form 1040-ES: Use this form to calculate your estimated tax payments based on your estimated taxable income and tax rates.
- Stay on schedule: Make sure to pay your estimated tax on time to avoid penalties and interest.
- Monitor your payments: Keep track of your tax payments and adjust your estimates if necessary.
- Consult a tax professional: If you're unsure about your tax obligations, it's always a good idea to consult with a licensed tax professional so your business stays compliant.
Starting on tax preparation early helps you maximize savings, take advantage of tax credits, and reduce your tax liability. Tax planning involves analyzing your financial situation and making strategic decisions to minimize your tax burden. A majority of firms say they spend over 40 hours each year preparing their tax returns, highlighting the importance of tax planning for small business owners.
Here are some tax planning and preparation strategies to help reduce your tax liability:
- Invest in equipment: One of the most popular tax planning strategies for small businesses is investing in equipment. This can result in significant savings on your tax bill. Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year, up to $1,080,000 (up from $1,050,000 in 2021).
- Hire new employees: The Work Opportunity Tax Credit (WOTC) is a federal tax credit that rewards employers for hiring individuals from certain target groups, such as veterans, ex-felons, and individuals receiving government assistance. Hiring new employees from these target groups, enables you to leverage this tax credit and reduce your tax liability.
- Track expenses and deductions: It's important to keep track of all business expenses and deductions throughout the year to maximize your tax savings. Deductions such as home office expenses, travel expenses, and business-related meals and entertainment can all reduce your taxable income.
- Review estimated tax payments: Review your estimated tax payments throughout the year to ensure they are in line with your actual tax liability. If you underpay your estimated taxes, you pay penalties and interest. If you overpay, you end up giving the government an interest-free loan.
Knowing which tax deductions your business is eligible for helps minimize your tax burden and maximize your savings. Tax deductions are expenses that can be subtracted from your taxable income, reducing the amount of tax you owe. To maximize deductions and avoid red flags that could trigger an audit, keep accurate records, be consistent with your deductions, understand the rules and limitations, and most importantly, be honest.
Here are some tips to help you identify and understand your eligible tax deductions and business expenses:
The IRS allows business owners to deduct ordinary expenses that are necessary for their business. This includes expenses such as:
- Office supplies and equipment
- Rent and utilities for your business space
- Business travel expenses, including transportation and lodging
- Insurance premiums
- Employee salaries and benefits
- Advertising and marketing costs
- Professional and legal fees
- Website development and hosting fees
- Depreciation of business assets
If you have a home office, you may be able to deduct expenses related to it. To qualify for this deduction, your home office must be used regularly and exclusively for business purposes. Expenses under this category include:
- Rent or mortgage interest
- Internet and phone bills
- Home office equipment and supplies
- Maintenance and repairs
If you use your personal vehicle for business purposes, you may be able to deduct expenses related to the business use of your car. Keep accurate records of your business use of your car, including dates, mileage, and purpose of the trip. These expenses may include:
- Gas and oil
- Repairs and maintenance
- Insurance premiums
- Depreciation of the car's value
You can also deduct expenses related to employee benefits and retirement plans, including:
- Health insurance premiums
- Retirement plan contributions
- Employee training and education expenses
As a small business owner, you are responsible for paying self-employment taxes, which may include both Social Security or Medicare taxes. However, you can deduct half of your self-employment taxes on your tax return. This deduction is taken on Form 1040, Schedule 1, Line 14 and is not subject to the 2% adjusted gross income limit that applies to some other miscellaneous itemized deductions.
You can deduct interest paid on business loans or lines of credit, as well as credit card interest related to business expenses.
The IRS allows you to deduct up to $5,000 in startup costs and another $5,000 in organizational costs for the first year of your business. This includes expenses such as market research, advertising, and legal fees.
Keeping detailed records of all business expenses and retaining all receipts and invoices is crucial if you want to take advantage of all eligible tax deductions. Just remember to avoid claiming deductions for personal expenses, and don’t exaggerate the amount of your deductions. . When in doubt, consider consulting a tax professional for more information and guidance on identifying your eligible tax deductions and business expenses.
Maintaining accurate tax records and staying compliant is important if you want to avoid tax penalties. To keep accurate records, start by organizing all financial documents, such as bank statements, receipts, and invoices. Use bookkeeping software to streamline recordkeeping so that you can ensure that all your transactions are properly recorded.
It is also important to comply with IRS regulations to avoid penalties and defend against tax audits. The IRS has specific rules and regulations for small businesses, including rules for recordkeeping, tax reporting, and payment deadlines. Familiarize yourself with these regulations. Use relevant IRS publications and forms, such as Form 1040, Schedule C, and Publication 535 to ensure that you are reporting your income and expenses accurately.
Regularly review your financial records to identify any errors or discrepancies. Keep track of important tax deadlines, such as filing and payment deadlines, and make estimated tax payments if necessary. Stay informed about changes to business tax filing processes and deadlines to avoid costly mistakes and to minimize the risk of being audited. If you do receive an audit notice, respond promptly and provide accurate and complete information to the IRS.
Tax professionals help you navigate complex tax regulations and identify opportunities to save money on your taxes. They can also represent you in the event of an audit, ensuring that you are properly defended and helping you avoid costly penalties.
There are different types of tax professionals to consider when seeking tax advice, including tax accountants, enrolled agents, and tax attorneys:
- Tax accountants can assist with tax preparation, planning, and compliance.
- Enrolled agents specialize in tax representation and can represent taxpayers in front of the IRS.
- Tax attorneys can offer legal representation in tax disputes, such as an audit or tax court case.
We recommend that small business owners establish a relationship with tax professionals to plan for the future even beyond tax season. Tax professionals can help you understand how changes in tax regulations and legislation may impact your business, and develop strategies to minimize your tax liability. In a nutshell, a tax professional can help you ensure that you are fully compliant with the latest IRS regulations and that you’re taking proper advantage of all available tax-saving opportunities.
Tax season can be daunting, but early tax preparation and the right tools can reduce stress and maximize your savings. Staying on top of tax planning, deductions, and expenses helps you minimize tax liability and avoid penalties. Using tax software and consulting with a tax professional if needed can be handy, especially when it comes to audit defense and tax-saving strategies.
Start now and get ahead. Organize your finances, plan for estimated tax payments, and get professional help, so you navigate tax season with confidence and focus on growing your business.
Fincent: Your Business's Personal Financial Wizard - From Bookkeeping to Tax Filing