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Can you believe we’re more than halfway through the year? Before you know it, a new year will be upon us and it will be time to meet with your tax professional to file last year’s tax return.
Wouldn’t it be great to have all of your tax documents and business records compiled, organized, and ready to go at the start of the new year? Then, you could work on crushing those 1st quarter income goals instead of scrambling to close out the previous year.
Now, you may be thinking – I have plenty of time to prepare for the tax filing season. Well, you sure do as long as you start now! And we have a handy checklist of tasks that will help you be proactive in organizing it all – sooner rather than later. Keep reading to learn some tips to help you make the tax filing process as smooth as possible:
4 Tax Filing Tips
Grab a copy of your prior year’s tax return.
The easiest place to start with gathering this year’s documentation is to start with last year’s tax return. What information or documentation was requested by your tax professional last year? Chances are, he or she will need the same information again this year, just updated. So, pull out that folder or download that digital file, and get started there.
But first, here’s a little Q + A.
Q: How long should you keep your completed tax returns?
A: As a rule of thumb, try to keep tax returns and supporting documentation for the most recent 7 years in case of an audit. The IRS has pretty clear rules about document retention if you’re into that sort of reading, but the minimum is 3 years, while 7 years covers most other scenarios. If you fail to file a return or file a fraudulent return, then you’re responsible for keeping supporting documentation indefinitely.
If it’s your first year in business and first year filing a tax return, you’ll need to bring along your business formation documents – such as articles of organization, tax ID number, any special tax elections filed, etc.
Generate financial statements and schedules.
Profit and loss statement + Balance sheet
If you’re using accounting software and have reconciled all of your transactions, this will be a walk in the park. You’ll need a profit and loss statement (or income statement) for the year and balance sheet as of December 31st.
Schedule of assets
You’ll also need a schedule of assets detailing any assets your business bought, sold, or disposed of during the year.
Get a head start on making sure you’re categorizing transactions properly and that you’re on track with your income goals by generating financial statements now and doing a quick review of them.
Your tax professional will mainly be concerned with the profit and loss statement, which is where business income and expenses will be shown. Business income and expenses will be categorized on your profit and loss statement according to the chart of accounts you created within the accounting software.
Chart of accounts
Set up your chart of accounts to mirror the categories used on your Schedule C for taxes (if your business is a sole proprietorship or single-member LLC). It saves a chunk of time computing and re-categorizing when it’s time to prepare your tax return for the year. All you or your accountant will need to do is record the balances in your schedule, and keep it moving!
Do you already have a chart of accounts or need more descriptive accounts for decision making and strategy than the Schedule C categories allow? Well, you can do both! Use the Schedule C category for the first portion of your account name plus “- your specific detailed account name” as a sub description. Here are a couple of examples – “Advertising – Printed Materials” and “Utilities – Electricity.”
Add up your business mileage and home office expenses.
Some find it easy to record mileage in a notebook. But, you already know there’s an app for just about everything! You should be tracking date/time, distance driven, and business purpose. A great app for mileage is MileIQ. It’s easy to set up on your phone and tracks your mileage while the app is running in the background on your phone. So, that means even if you forget to turn it on specifically for your trip, it still has you covered.
Home office deduction
If your home is your primary place of business or you frequently meet with clients there, then you may qualify for the home office deduction. Obtaining adequate documentation means finding the square footage of the space you occupy plus your annual utility bills, repairs and maintenance, and year-end mortgage statement. Using this documentation, you or your accountant can determine the proportion of your home expenses related to your business.
Compile support for estimated taxes paid, if any, during the year.
Estimated taxes are amounts you withhold and send in to the IRS quarterly to offset your year-end tax liability. It’s important that you make a fair estimation using one of the criteria established by the IRS, or you could be charged a penalty for underpayment. You should have cancelled checks or bank statements and copies of your payment vouchers to support estimated taxes paid during the year. Your tax professional will need these amounts to offset your tax liability for the year.
And, there you have it – a quick checklist of 4 unbelievably easy tasks that will get you organized and leave you feeling stress-free when it’s time to file your taxes!
Want more accounting tips? Check out our webinar recording, Accounting 101 for Bloggers & Creative Entrepreneurs. You’ll learn everything you need to know about staying on top of your taxes and finances!