HomeInspireDown to Business

6 best practises for managing your small business's taxes

BY READERS DIGEST

11th Apr 2022 Down to Business

6 best practises for managing your small business's taxes
Tax time can feel intimidating. But it doesn't have to be this way! This article explores six best practises for managing your small business's taxes easier and more efficiently.
Taxes are one of the most hated topics among all business owners. Yet, while boring, complex, and intimidating, talking about taxes is a must for the financial and legal wellbeing of your business.
We get it! Navigating through the sea of taxes, exemptions, regulations, fixed deadlines, and compliances can feel like a headache, especially when you already have a lot on your plate as a business owner. Yet, it is critical that you are set up for success well before tax season arrives.
When tax time is close, small business owners' stress goes up. You're probably no exception to the rule. But what if there is a way to make sure you minimise the amount of stress you feel when taxes are due? This article explains six best practises for staying ahead of your taxes so that you'll be less stressed and anxious when that time of the year comes.

1. Correctly classify your business

First things first, one essential step you need to take in order to make sure that you get your taxes right is to classify your business correctly. Note that different business types pay taxes in different ways. So, if you fail to classify yours correctly, you may end up overpaying taxes.
So, one important thing you need to do is to decide whether you want to classify your business as Limited Liability Partnership, Limited company, Partnership or Sole trader. All these four main business structures have different tax obligations and different ways to prepare and pay them.
It is wise to discuss with an attorney and accountant to determine how your business should be classified and learn the different effects your taxes will see based on the structure you choose.

2. Work with an accountant

No matter the size or industry, most businesses work with an accountant to ensure that their businesses' finances are kept at bay.
Accountants don't only help you with tax preparation. They also take care of bookkeeping, helping you understand your expenses and avoid financial mistakes that may cost you big when tax season arrives.
Note that your accountant should help you throughout the year, not only when tax-paying is due. A financial expert should track your income and spending all year round and make sure that there's no issue with your cash flow. So, from day one of opening your business, make sure you have an experienced accountant by your side.
If you're a small business with a limited budget and you can't invest in hiring an in-house accountant, make sure that you do the accounting job yourself until you have the resources to leave it to the pros. Luckily, wearing the CFO hat for your business is easier when technology is at your fingerprint. For example, software for accounting tools can simplify your work and help you get the accounting right for the survival and growth of your business.

3. Use a checklist of last year's documents

One of the most boring and tedious tasks related to tax preparation is gathering all tax documents. So, since you're doing such a time-consuming and unexciting job, it's very easy to overlook something accidentally.
But here's a trick that can help you make sure that you don't make mistakes and gather all the documents you need to pay your taxes correctly: use last year's checklist of documents.
If this isn't your first tax season, you've likely already gone through all the hard work of figuring out exactly what documents you need for tax preparation. So, why not use this knowledge to simplify things for the next tax season?
See what documents you have submitted the year before, gather these documents and see if there's anything extra you may need for this year's season. There's still some research needed, but you'll have a good starting point knowing the majority of documents you need.

4. Keep adequate records throughout the year

Knowing the ins and outs of your business's financial status is not something that's important only during the tax season. You should be involved in keeping accurate records throughout the year.
Truth be told, the accuracy of your records will positively impact your tax return. More precisely, without adequate records, you're very likely to end up with deductions left on the table or, even worse, you could put your business at risk for an audit.
You should invest in an accounting solution that will help you keep accurate records of all your income and expenses. This will also help you greatly become compliant with Making Tax Digita, as it allows you to leave the spreadsheets or paper records behind and move over to a new and more efficient system.

5. Keep your business and personal expenses separated

One gold rule of correct tax preparation is to make sure that your business and personal expenses never get mixed. It can be tempting to use business money for personal expenses and the other way round. However, this is a practice that can bring havoc to your finances, both personal and business.
Make sure that every purchase and transaction that is related to your business has been made through your business credit card or account. This way, when you sit down to prepare your taxes, everything is separated, and you don't work extra to figure out which expenses are specific to your business and which are for personal purposes.

6. Leave it to the pros

Preparing taxes is not rocket science, but it does require some deep financial knowledge. So, how about you leave your tax filing to pros? If you don't work with an accountant, at least look for a financial advisor to help you handle your tax preparation.
Allowing a professional to handle this job for your business will free up more of your time so that you can focus on essential business operations and spare you from all the headaches often experienced by business owners during the tax season.
Keep up with the top stories from Reader’s Digest by subscribing to our weekly newsletter.