If you’re one of the many small business owners who hasn’t done his or her bookkeeping all year long, this tax season will unfortunately be a stressful time as you frantically scramble to pull together all your receipts and business expenses, trying to account for every single thing you did in 2014.
To help you through this period, here's a useful checklist of the top four things you should do before you turn your books over to your tax preparer:
1. File for an extension.
Give yourself enough time to compile your financial documents in order before you throw a "Hail Mary” pass to get them to your tax preparer. You have no idea how long this process will take, so it’s best to grant yourself enough time.
Don’t wait until April 14 to request an extension for filing a tax return. Keep in mind that you will also need to calculate potential taxes due and send that along with your extension request. If you feel you have already paid the taxes due, you don’t need to worry about this.
But if your income has increased over what you estimated during the year or your expenses are lower than anticipated, you will need to pay the amount owed or be subject to penalties and interest when you finally do pay your taxes.
2. Gather all fiscal records.
Compile documentation for all your purchases, business expenses, income and records of transactions, pulling all your receipts, bank statements, cancelled checks and paid bills.
If you’re a small business owner who has a tendency to put some expenses (like for a home office) on personal credit cards, that documentation also needs to be gathered to ensure all business costs are captured.
3. Sort and categorize financial documents.
After you have collated your financial statements, sort and categorize each business expense into different buckets, such as auto expenses, home-office expenses, utilities, medical expenses, office supplies and charitable contributions. That way the tax preparer can easily access the right numbers, feed them into a spreadsheet and run calculations to figure out deductions you may be eligible for.
4. Make sure all income is documented.
Tracking income is the area where small business owners can really get into trouble. You need to be able to say to your tax preparer, “this is how much money I made this year,” because if the Internal Revenue Service audits you, the figure must be 100 percent accurate.
The IRS doesn’t care if you fail to report all your business expenses but will pursue you for failing to report your income properly.
After Tax Day is finally in the rearview mirror and you've filed your return, sit down and try to identify a better way of maintaining your financial records -- not just during tax season but all year round, so that you’re not in this same situation again next year.
If you don’t have time to do a little bookkeeping each day, when will you find time to record a month's or a year's worth of records? Different people have different systems. What matters the most is that you have a system and use it daily -- whether you hire a professional bookkeeper or do it yourself.