Business owner checking their business's tax health

Small Business Tax Health Checklist

6 min read • Jan 21, 2020 • Grant Olsen

Years ago, Albert Einstein was asked about the process of completing his income tax form. “This is a question too difficult for a mathematician,” he replied. “It should be asked of a philosopher.” These words could very well send a chill down the spine of any taxpayer. After all, if one of the smartest individuals in history struggles with something, it doesn’t bode well for the rest of us. 

When it comes to taxes for small businesses, the questions often come fast and furious. How much money will I owe? Can I reduce this amount? What can I do now to make next year’s taxes easier?

Every small business has unique financial details, so there are no universal answers. What is guaranteed is that you need to invest time in your taxes if you don’t want them to divest too much money from you. 

There are 2 primary questions to consider about your business’s tax health. First, are you actively looking for strategies to legally lower your taxable income? Second, are you consistently making time to implement these efforts? If you answered yes to both questions, then keep up the good work. If you answered no, it’s time to get into gear. Entering tax season unprepared hurts your bottom line and potentially exposes you to other issues stemming from your lack of preparation.

“For small business owners, filing tax returns can be a painful experience,” writes a small business tax expert for Forbes. “Often, data is gathered over an evening or a weekend and can be incomplete. Stay organized all year. It winds up saving time and stress. Keep a separate file for taxes, and make sure income and expenses are categorized in the computer or ledger and are accurate. Then, it is just a matter of printing it out.” 

An incremental approach is advisable with most endeavors in life. But it’s particularly relevant when you’re dealing with the US tax code, which is thousands of pages long and doesn’t take no for an answer.

The following checklist can help you prepare for next tax season and put a sustainable plan in place for the future. It’s not intended to be comprehensive, as there are thousands of disparate factors that might impact your tax situation. But it’s a great way to start thinking about how you can improve your strategy.

Have you hired a good financial adviser?

At the very minimum, you should have a trusted accountant help prepare your taxes each year. The value increases exponentially when you enlist an adviser to work with you throughout the year, guiding you through complex tax laws and helping you maximize your profits.

Are you leveraging technology?

If you’re using paper records at this point, you’re wasting your time. Software like Sunrise makes your life easier throughout the year. And you can look for other ways to streamline your processes, such as using Skype to chat with your financial adviser instead of making a lengthy commute.

Have you considered fringe benefits?

When you increase wages for your employees, there will be a corresponding impact on your employment tax costs. Consider using other benefits in your compensation, such as long-term healthcare, education reimbursement, dependent care assistance, or onsite meals, to increase their overall compensation without increasing your taxable income.

Have you considered your business structure?

Entrepreneurs operating as a partnership or sole proprietorship may want to change to a limited liability company (LLC) because they’re a “pass-through entity” and provide more flexibility in how your business income is handled tax-wise. Depending on your unique situation, the restructuring of your business could potentially save you a lot of money. 

Are you eligible for the health care tax credit?

As long as your business meets the requirements outlined by the IRS, you might qualify for this money-saving credit. Talk to your adviser and find out if it can be part of your tax strategy.

Can you deduct any of your property?

If you started using new property in the past tax year, see if it’s eligible for a Section 179 deduction. Many businesses use this method to lower their taxable income.

Can you deduct any of your charitable contributions?

When your charitable efforts also benefit your finances, it seems that everyone wins. Remember, your contributions don’t always have to be in cash to qualify. You should also think about any contributions that might’ve been in stocks or volunteer expenses.

Do you qualify for a work opportunity tax credit?

If you’ve hired people with disabilities, military veterans, or individuals from other disadvantaged groups, thanks for being open-minded in your hiring. Your efforts might also qualify for a work opportunity tax credit.

Have you accounted for all other deductions?

While major deductions draw most of the attention, don’t neglect the smaller, miscellaneous opportunities each year to get additional deductions. These might include magazine subscriptions, business travel, and fees associated with your business card.

Have you done an end-of-year review?

With the help of your tax adviser, conduct a thorough review of the year. Diverse factors will always impact your taxable income, such as asset depreciation or unpaid receivables.

Are you prepared to submit your taxes on time?

If you’ve made an effort throughout the year to prepare for your tax submission, you should be ready to roll on April 15. File late and you could incur a fee. Pay late and you could get dinged again. These expenses are avoidable as long as you’ve made an effort to get your ducks in a row ahead of time.

The bottom line is that there are abundant opportunities for your small business to save money on taxes. First, you need to identify these opportunities with the help of a financial adviser. Second, you need to organize and manage your finances in a way that allows you to prove you qualify for the relevant credits and deductions. By making taxes a year-round focus, you’ll position your small business to come out on top.

 

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Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.