Black Friday is over. The Holiday season is in full-swing and tax season is just around the corner. As overwhelming as the day-to-day transactions of your business may be, it may just be the perfect time to assess the financial health of your small-to-medium business (SMB).
Most SMB owners may not know this fact, but the Internal Revenue Service’s largest department is their Small Business Division. With such deep resources, you should know that your tax return will be combed through, scrutinized, and checked twice just like Santa’s list. The thought of a tax audit of your small business books can be a scary thing, and with the Holiday season we have several simple things you can do now to protect yourself from those men in black coats knocking on your business’ door.
- File away that stack of receipts and invoices that have been sitting on your desk for the last month. While filing, categorize and chronologically organize each item so that your accountant will be able to complete your return more efficiently. This saves you money in the long run as your accountant’s billable hours will be lower when tax prep time comes around.
- List all your sources of income, and have organized accounting logs and deposit forms to show where that income went. If you are a SMB owner, and you’re completing a combined return, keep your income logs separate. Personal income may not always be taxable (personal loans, gifts, etc.), so having an easy breakdown may be helpful in justifying why that isn't claimed on your tax return.
- Use a tax professional to prepare your return. Having someone who specializes and understands the current tax code and the seemingly endless list of small business tax deductions and credits, or can flag potential issues beforehand will reduce your stress and can usually assist you in the event the IRS decides to look into your return.
- Perform a self-audit to gauge your clerical and financial health. An audit can be as basic as reconciling your books and identifying delinquent accounts to collect on, to more complex based on your company’s size and industry and your current business health. Use the opportunity to really look through your SMB and ensure checks and balances are in place that you can answer any questions the IRS may have. For a guide to your industry, take a look at the IRS Audit Techniques Guides categorized by industry.
Self-Auditing Your Business’ Books
A well planned audit asks questions about your current situation to help with generating a forecast for the next month, quarter, or year. An audit also assists in bring together many of the key pieces of information or data you will need come January 1st.
So dust off that old bookkeeper’s log or fire up that Excel file your CPA-friend gave you, and answer these simple questions:
- When was the last time you reconciled your books and accounts?
- Can you identify for your current expenses? Do you have their matching account credits? (A practice also known as Double Entry Accounting)
- Can you identify your outstanding accounts payable? Are you up-to-date on invoicing vendors?
- Are you ready to process employees’ W2s or vendors’ 1099s? If you are self-employed, are you ready to file your self-employment return?
- Do you have simple, easy-to-use reports on your business’ standing and financial health that would assist if you were audited?
Post-Audit, Finding the Solution
So now your eyes are crossed, head spinning, and you are realizing you could use help in streamlining for efficiency to ease the anxiety the results of your audit gave you.
Here are a few easy, helpful basic accounting tips and best practices for SMB or self-employed business owners that will help keep your house in order:
- If you do not have one, begin using an online accounting software. Cloud-based accounting software options allow users to log in from most computers with an internet connection and see the same information across different platforms.
- If you do not invoice electronically, try it. Consider accepting electronic payments from vendors through online payment vendors. The nice part about electronic payments is that it simplifies your process for reconciling accounts, which again saves you time and money. However, when considering these options, always look for their level of PCI Security Compliance.
- Develop and implement weekly or monthly reports that you can review with your accountant or staff that can account for expenses and income, to ensure you paid on time, or can track project spending. Many online accounting software options allow for you to label your expenses and incomes based on their type, which aids in creating these accounts.
Implementing these principles can save your business the headache of scrambling come January 1st, as well as keeping you off the IRS’ radar. The fewer discrepancies you have on your tax return, the less likely you are to be audited.
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