Business Credit
3 business scenarios that need money to make money
Houston-based CPA Byron L. Riley is a firm believer that a smooth tax season greatly depends on your organizational skills. With over 20 years of tax prep experience, he has filed returns for a wide range of small businesses, including learning centers, contractors, plumbers, and car dealerships. We spoke with Byron about how small businesses can prepare for tax season, and how he recommends staying abreast of the 2018 tax reform changes.
Organize your data. Oftentimes, people will let the mail stack up or they can't find receipts. If you put a system in place, whether it be a manila folder or email folder, you'll be better off. The biggest thing about tax preparation is getting organized, because your returns will only be prepared as well as the information you present. You don't want to miss an opportunity for a deduction or tax savings strategy just because you can't find the necessary paperwork.
I recommend maintaining clean income statements and making sure you're tracking your miles properly. Inconsistent mileage tracking is something that many small businesses struggle with. Mileage tracking isn't just taking note of when you went from point A to point B; it's explaining why you went from point A to point B and what was happening there - what was the purpose of the business meeting? Small business owners will want to have good records for that. This way, if you come up against an audit, you'll be able to defend your position for taking the miles deduction.
Be mindful of how timing can affect things as well. Before December 31, you have more opportunity for buying things for deductions, but come January the window has closed for making certain purchases. Keep your records current as you go through the year, and then when September and October come along you can get into more advanced tax planning. You'll be able to estimate your tax liability and decide from there if you need to buy some new equipment, give your employees bonuses, or consider increasing expenses. Tax planning should really take place heavily in the fourth quarter. Most people want to get started in the first quarter, but the fact of the matter is, tax preparation is a historical approach, which means you're preparing based on financial events that have already occurred.
For entrepreneurs, I always try to emphasize that tax prep for small businesses isn't an one-size-fits-all practice. Tax preparation is kind of like a thumb print - no two tax returns are exactly the same. For example, let's take a graphic designer who generates $500,000 in sales and a plumber who does $1 million in sales. Despite the fact that the designer makes less, they very well might be paying more in taxes because they may have fewer deductions to claim than the plumber, resulting in greater net income compared to the plumber.
We're facing one of the largest tax changes in 30 years, so how do you know if your tax professional is prepared? I'd recommend asking them if they've taken any classes or training around the upcoming changes. This is especially important because stakes are higher for business owners this year. If you're a small business owner and your income is below a certain threshold, you automatically qualify for a 20 percent deduction. If you're over the threshold, you can still qualify for a deduction, but there are different calculations you have to do. That's why you really want to make sure that the person who's preparing your taxes is keeping abreast of the new tax changes.
.svg)
