It’s almost tax season!
And with it comes the likelihood for frenzy and chaos, unless you’re prepared. If you are, it’ll be a smooth ride. Follow these five bookkeeping tips to get a head start on your tax preparation.
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When you track every transaction—whether it’s a sale, a bill, or a client payment—you’ll save yourself the headache of piecing things together later. Use accounting automation tools like QuickBooks or Xero. They will automatically sync transactions from your bank accounts and credit cards so you don’t have to worry about missing anything.
You can also use these accounting softwares to categorize your expenses, like rent, utilities, and supplies. That way, it will become easier for you to spot deductions and keep your finances in check. Don’t be like that freelance designer who doesn’t record anything, be it client payments or software subscriptions, and runs around like a clueless chicken during tax season.
The format doesn’t matter as long as nothing is left out. Business owners sometimes open bank or credit accounts for their operations but fail to record these in their bookkeeping. This can lead to underreported income, expenses, or both. Regardless, these inconsistencies may cause complications down the line.
For example, once a freelancer didn’t report earnings from a PayPal account they used for client payments. In another instance, a luxury retail brand overlooked revenue processed through its Stripe account, which was set up for online transactions. This mistake resulted in incomplete financial statements and compliance issues during a tax audit. To avoid such issues, it’s always advisable to ascertain that all accounts associated with your business are included and update your records accordingly to avoid such costly oversights.
Pro Tip: If this feels overwhelming, consider hiring an experienced accountant or bookkeeper. They can save you a lot of time and help you avoid mistakes that could lead to penalties later. Plus, they’ll make sure you don’t forget any financial accounts.
After you’ve identified all your accounts and sorted your transactions into income and expenses, now, let’s get into the process of reconciliation. This means you’ll need to compare your internal records with your bank and credit card statements to make sure everything matches. Do this often to catch any errors early before they become bigger problems. Cross-check each transaction in your bookkeeping system with your bank statements and fix any discrepancies.
Aim to do this monthly, so your records are always up-to-date and you have ample time to fix the missing or duplicate transaction before it impacts your year-end financials.
The sooner you identify and categorize your deductible expenses, the more you can reduce your taxable income.
Common small business deductions include the home office deduction, which allows you to deduct a portion of your rent, mortgage, utilities, and internet if you use part of your home for business. You can also deduct vehicle expenses if you use your car for business—either the actual costs like gas and repairs or the standard mileage deduction. Don’t forget about supplies and equipment necessary for your business, as well as employee benefits like health insurance or retirement contributions. They are all tax-deductible. Professional fees paid to accountants and lawyers are deductible too. That said, keep in mind that in order to maximize your deductions and potentially save thousands of dollars on taxes, you have to start organizing all the receipts ahead of time.
Staying organized with your financial documents is essential for a smooth tax season. It makes filing easier and ensures you have everything you need in case of an audit. Start by gathering key documents like profit and loss statements. They summarize your income and expenses for the year, and are therefore critical for calculating your taxable income.
Keep all receipts and invoices for business-related purchases, whether digital or physical, as these back up your deduction claims. You’ll also need to review bank and credit card statements to verify your income and expenses. If you have employees, make sure your payroll records are also updated regularly.
Lastly, don’t forget to submit your financial statements to your tax preparer or CPA—they’re experts at handling your taxes. Use their knowledge to ask questions and explore ways to streamline your bookkeeping and payroll services as your business grows.
Filing and paying your taxes doesn’t have to be stressful. With a little organization and early preparation, you can avoid unpleasant surprises. Also, now that you’re familiar with the best bookkeeping practices, start setting aside money for your corporation tax before the year ends. Come tax season, you’ll have the funds ready and avoid facing a last-minute panic.
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