Why Mid-Year Tax Reviews Are a Must for First-Time Entrepreneurs
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Just about every entrepreneur knows the feeling, that end-of-year tax-related anxiety. Shoeboxes of receipts, mountains of transactions to approve, piles of forms to file… all conveniently scheduled to annoy you right around the holiday season. From an accounting perspective, the end of the year can be quite challenging for the first-time entrepreneur.
But it doesn’t have to be. These quick tasks — that you can tackle now — can help make the end of the year much more bearable.
Do a mid-year tax review.
If you’re not already doing so, perform a mid-year review of your tax situation, recommends Jennifer Todd, an accountant and a contributing blogger at Kashoo. The reason is, she explains, there are strategies that you could implement now that could help you down the road. Plus, she adds: “It is almost impossible to tax ‘plan’ after-the-fact.” Here are three areas she suggests mining for tax savings:
- Set up a tax deferred retirement account
- Purchase fixed assets now instead of waiting until 2013
- Time your vendor payables and customer receivables
If you use the cash-basis accounting method — that is, you recognize revenues and expenses when cash is received or spent — you might minimize your taxes by either deferring cash inflows or accelerating out flows. In other words, pushing off your collections or spending the money you have on hand can help reduce your tax liability. For those who use the accrual accounting method, which requires the recognition of income and expenses at the time revenue and liabilities are incurred, consider timing your big-ticket purchases for maximum effect. When you should sign a major client also matters for those using this method. In some instances, if you know you’re going to be purchasing a piece of equipment anyway, it may make sense to have that booked in a prior period.
And although some retirement accounts give you until the due date of the tax return to fund the account for the prior year, Todd warns, never procrastinate. Setting up a retirement account and funding it in the current year typically makes the most sense. Of course, by doing so, you’re not going to receive a dollar-for-dollar deduction, but it will certainly lower what you owe in taxes this year.
The worst part about keeping track of expenses is literally keeping track of expenses, or organizing and documenting your receipts. (You probably have a pile of them wadded in your wallet or purse or stacked on your desk right now.) That pile is only going to get larger through the year, so you need to send yourself to receipt bootcamp. Dedicate an afternoon to digitally capturing all of your receipts. It’s a necessary evil, but it will make the end of the year easier.
Lots of small businesses use contractors for various tasks. And at the end of the year, it can be a hassle trying to collect W-9 forms from all of the folks you’ve worked with over the year. While it’s best to make a W-9 mandatory at the start of an engagement, you could have slipped up here and there. As such, do a review of the contractors you’ve used year-to-date and get W-9s from them. Todd stresses that you’re only going to have missing info if you try to collect tax ID numbers and other pertinent information at the end of the year. And since you have to file those forms by January 31, you might find yourself scrambling.
At the end of the day, procrastination is the number one arch enemy of accounting. Take some time now to tackle these tasks and you’ll find you have more time at the end of the year to send your customers awesome holiday gifts. (No fruitcake for us here at Kashoo HQ, please.)
What mid-year accounting rituals do you have to stay on track for the year end? Let us know in the comments section below.