Businesses, just like individuals, need to pay income taxes. They file quarterly reports and then also an annual income tax return. That annual return helps reconcile prior tax contributions with the actual amount due based on end-of-year financial reports.
Owners and executives preparing for tax season often feel anxious, especially in the wake of the first year that they ran a business or owned their own company. How can a business owner prepare for tax season?
Gather financial records
Certain documents play an important role in the tax preparation process. These documents include business identification paperwork, payroll records and other key financial records. Gross receipts, sales records and even statements for financial accounts can factor into the tax preparation process. People need to get all of those documents together before sitting down with a professional.
Itemize business expenses
While accountants can manage the process of reviewing and categorizing business expenses, it is often easier and more cost-effective to have the executive handle this process. Reviewing the collected financial records and creating a thorough list of business expenses categorized based on purpose can help speed up the tax filing process.
Review payroll tax information
In addition to filing a business income tax return, the company must send out key financial documents to employees by the end of January. Therefore, a thorough review of payroll tax withholdings is important early in the tax season. Businesses need to identify any shortfalls to address them in the next year and to send out the relevant documents to both the Internal Revenue Service (IRS) and individual employees.
Identify relevant credits and deductions
Generally speaking, tax professionals should help business owners determine what deductions and credits apply to their organization’s annual tax return. However, business owners can jump-start the process by reviewing current deductions and credits to better estimate what expenditures may reduce tax obligations. They can then highlight those records to ensure that they adequately use legal means to minimize tax obligations.
Recognize when an extension is necessary
Particularly during the first year of business operations, it is common for executives and owners to make mistakes regarding their tax obligations. They may not retain enough capital to cover income taxes. Therefore, they may need to file for an extension. Submitting paperwork at the 11th hour may lead to delays in response that trigger anxiety. Those who are aware going into the tax season that they may require an extension can apply earlier and begin planning to cover their tax obligations as soon as possible.
Having a plan in place when preparing to file business taxes can take some of the risk out of the process.