As tax time approaches, many business owners scold themselves for not keeping better records throughout the year. If your filing system consists of a box overflowing with invoices and receipts, this is a great time to consider a different, more effective approach to organizing your business’s finances. There are many advantages to optimizing your record-keeping practices. When relevant documents are easy to find, you can save yourself or your accountant time and frustration. Documentation is key if you’re planning on claiming business tax deductions. Tweet This Finally, a consistent record-keeping system can be useful in the event you’re ever audited and need to substantiate information from your tax returns.
How to get started? Here are five tips to help your business organize its financial records for tax time.
1. Keep business and personal accounts separate.
Commingling funds can make it difficult to locate tax-deductible business expenses down the line. Debts paid from company accounts can also help build business credit, while transactions via personal credit cards or checks will not. Finally, mixing business and personal expenses can become a liability if you’re ever audited or sued. The Internal Revenue Service or opposing attorneys could try and make the case that your business was operating to cover up your own spending. Keep things simple by keeping accounts separate.
2. Organize invoices and receipts by company.
It’s important for a business owner to have easy access to financial documents, and this doesn’t just apply at tax time. File receipts and invoices by company and date to make life easier if you ever need to reference these documents. Make sure to keep receipts when you pay cash, since these transactions won’t show up on your credit card statements. Whether you’re filing taxes or pursuing a bad business debt, documentation can lend support to your claims.
3. Plan ahead when it comes to business tax deductions.
New business owners may not be familiar with all of the tax deductions that could apply to their company. These include expenses like mileage, rent, entertainment costs, and the depreciation of equipment. Once you understand business tax deductions you may be eligible to claim, track your expenses accordingly. This approach is much more convenient than scrambling to find receipts at filing time.
Your tax advisor can also help you with finding deductions your business may be eligible for.
4. Use accounting software.
Gone are the days of oversized ledgers and pencil-on-paper calculations. Even seasoned accountants rely upon accounting software to accurately track company finances. There are many affordable options available to small businesses. Several programs even allow you to scan documents to reduce the clutter that comes with paper records. A simple online search for “accounting software” can help you find the right program for your business.
5. Reconcile your accounts on a regular basis.
Few people enjoy balancing their books, but it’s a necessary part of ensuring that a business’s finances are in order. You need current information in order to forecast cash flow and taxable income. If math isn’t your strong suit, consider hiring a bookkeeper to help. The added expense will almost certainly save you time and frustration, and could reduce the chances of running into trouble with the IRS.
Tax time can be crucial for some small businesses and can greatly affect your cash flow. While waiting on your tax return, check out other funding options.
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