We all know that paying taxes is one of the least favorite parts of our lives, but it inevitably still needs to get done. So how can you be in good shape when it comes to paying Uncle Sam? First, stop procrastinating! It's time to get your 2005 information compiled and make a plan for 2006 so you're not behind the eight ball when it comes time to file. These 12 tips will help you pull it all together and get your taxes under control:
1. Don't wait until the day your taxes are due to pull everything together and call your tax preparer. They can't give you the best service if you aren't helping them provide you with the information that pertains to your situation. Communicate with them throughout the year so they can provide advice to you proactively instead of reactively.
2. Be cautious about preparing your own business taxes. It's one thing to prepare your taxes as an individual, but the opportunity for errors multiplies when you file business returns. You aren't a tax expert, so isn't it worth the investment to have someone who focuses full time on the tax laws help you?
3. Use software to help you compile your data. Ideally you've been using an accounting package like QuickBooks to help you track your income and expenses. If not, it's a good investment for the new year--and for the old. If nothing else, using a spreadsheet is better than using a shoebox. A computer program makes it easy for you to double check in order to minimize errors.
4. Know your deadlines. Depending on when your tax year ends and what type of business entity your company is, the deadlines will be different. In addition, there are lots of other tax deadlines for various other business filings. To minimize unnecessary penalties and interest, be sure to note these deadlines on your calendar to help you meet them.
5. Make sure you have the right forms. If you're filing your business taxes yourself, the forms you need to file will depend on what type of business entity your company is (S corporation, C corporation, sole proprietor, partnership and so on). Double check to make sure you have the right forms for your business structure.
6. Take a home office deduction, if you qualify. You're entitled to write off business expenses, such as rent, utilities, insurance and housekeeping proportionate to the part of your home where you exclusively conduct business. There's a tax trap here, however: If you own your home, you may have to pay taxes on part of the capital gains when you sell it. It pays to weigh the pros and cons of this choice prior to taking the deduction.
7. Check to see if there are any special tax considerations or opportunities for your specific industry. Each industry has different thresholds for different aspects, so make sure you know the options for your industry.
8. Don't forget to take into consideration your depreciation of your fixed assets. Sometimes inexperienced business owners don't fully understand the concept of depreciation. You have to be knowledgeable enough about the tax laws regarding fixed assets, as you can't just expense them when they provided economical benefits for longer than this year. And because there are various depreciation methods you can utilize to capture the depreciation expense, it might be wise to speak to a tax professional about exactly what you can expense.
9. Contribute to a retirement plan. This can reduce your tax liability and help you save for the future. You'll then be paying yourself vs. paying the government. You still have time to make plan contributions for last year.
10. Make copies of your tax return for your records. It just makes good business sense to have copies of all the paperwork you send out to your local state and IRS agencies. You never know what can happen and when you'll need to be able to reproduce a copy of the filings you've made. So make a duplicate for your records.
11. Keep your documentation. Don't think you can throw away that backup paperwork just because you've filed your taxes. You need to store the documentation for potential future reference. You should keep any and all documents that may have an impact on your federal tax return, including these:
- Credit card and other receipts
- Copies of any bills or invoices
- Mileage logs and documentation
- Canceled checks or any other proof of payment
- Any other records to support deductions or credits you claim on your return
12. Make a plan for the new year. What can you do to improve your business tax position for the upcoming year? Many entrepreneurs make business decisions without considering the tax implications. But there are lots of choices that can impact your taxes, so consider those aspects prior to making any decision. Waiting until after the choice has been made usually provides minimal options for change.