In this article, our CPAs discuss several instances in which you can and cannot deduct…
As a small business accounting firm, C.E. Thorn, CPA, PLLC understands the challenges and opportunities that come with running a successful enterprise. Proper tax preparation is not only a legal obligation but also a strategic financial practice that can significantly impact your business's bottom line.
Join our Raleigh CPAs as we explore the best practices for small business tax preparation and provide tips to help you stay compliant. When your small business is tax-compliant, you can be poised for financial success.
#1 - Maintain Accurate Records for Small Business Tax Preparation
Maintaining accurate records is a fundamental aspect of running a successful and compliant small business. Whether you're just starting or have been operating for years, implementing detailed and organized small business bookkeeping strategies is crucial.
Use Accounting Software
Consider using accounting software to track income, expenses, and invoices automatically. These tools can streamline the record-keeping process and reduce the likelihood of human error.
Regularly Reconcile Accounts
Reconcile your bank and credit card statements regularly to ensure that all transactions are accurately recorded in your books.
Save Digital Copies
Keep digital copies of all important documents, such as receipts, invoices, and contracts. Digital storage is secure and helps free up physical space in your office.
Establish a Filing System
Organize your records using a consistent and logical filing system. Label folders and use appropriate categories to make retrieval and organization easier.
Set Aside Time for Record-Keeping
Dedicate regular time each week or month to update your financial records. Consistency is key to keeping your records accurate and up to date.
Backup Your Data
Ensure you have reliable data backups in case of computer malfunctions or data loss. Cloud storage or external hard drives can be useful for backing up essential records.
Educate Your Team
If you have employees, make sure they understand the importance of accurate record-keeping and provide training on how to document business transactions properly.
#2 - Separate Business and Personal Finances
Separating business and personal finances is a critical best practice for small business tax preparation and overall financial record management. When you keep your business and personal funds separate, you create a clear distinction between your personal expenses and those related to your business.
Open a Business Bank Account
As soon as you start your business, open a dedicated business checking account. This account will be used exclusively for business-related transactions.
Get a Business Credit Card
Apply for a separate credit card for your small business expenses. This helps maintain a clear distinction between personal and business purchases.
Pay Yourself a Salary
If you're a business owner, establish a regular salary for yourself and transfer funds from your business account to your personal account accordingly. This way, you can manage your personal finances while maintaining separation.
Avoid Personal Expenses from Business Accounts
Be diligent about not using business funds for personal expenses, and vice versa. Keep a watchful eye on transactions to ensure compliance.
#3 - Choose the Right Business Structure
The business structure of your small business can have significant implications for your tax liability, legal obligations, and overall financial success. It's essential to evaluate the different options available and select the one that aligns best with your business goals and needs.
This is the simplest and most common structure for small businesses. A sole proprietorship offers no legal distinction between the owner and the business, resulting in personal liability for all debts and obligations. Sole proprietorships report business income and expenses on the owner's personal tax return (Form 1040).
When two or more individuals join to operate a business, a general partnership is formed. Partners share profits, losses, and management responsibilities. Like sole proprietors, partners report business income and expenses on their personal tax returns.
Limited Liability Company (LLC)
An LLC provides limited liability protection to its owners (members), shielding them from personal liability for the company's debts. LLCs offer flexibility in taxation, allowing members to choose between being taxed as a disregarded entity (for single-member LLCs), partnership, or corporation.
An S Corp is a tax designation rather than a separate business structure. It allows eligible corporations to pass corporate income, losses, deductions, and credits through to their shareholders, avoiding double taxation. S Corps have specific eligibility requirements.
A C Corp is a separate legal entity from its owners, offering limited liability protection to shareholders. However, C Corps are subject to double taxation, as the corporation pays taxes on its profits, and shareholders also pay taxes on dividends received.
#4 - Small Business Tax Preparation by Utilizing Deductions and Credits
Utilizing deductions and credits is one of the most effective ways for small businesses to reduce their tax liability and optimize their small business tax preparation. Deductions and credits allow businesses to lower their taxable income, resulting in potential savings on their overall tax bill. Understanding and strategically leveraging these tax breaks can significantly benefit your business's financial health.
Keep up-to-date with changes in tax laws and regulations that may impact your business. Tax codes can change regularly, and understanding the latest rules will help you identify eligible deductions and credits.
Practice Proper Record Keeping Procedures
Proper record-keeping is essential for claiming deductions and credits. Keep detailed records of all business expenses, purchases, and income. Retain receipts, invoices, and other supporting documentation to substantiate your claims.
Identify Eligible Deductions
Familiarize yourself with common small business deductions, such as business-related expenses, depreciation, home office deductions, and qualified retirement contributions. Keep track of these expenses throughout the year to ensure you capture them accurately during small business tax preparation.
Explore Tax Credits
Tax credits offer a dollar-for-dollar reduction in your tax liability. Research and identify tax credits that your business may qualify for, such as those related to research and development, hiring certain employees, or investing in renewable energy.
Plan Major Expenses Strategically
If you have significant business expenditures planned, consider the timing to maximize tax benefits. Timing purchases, investments, or equipment upgrades toward the end of the tax year can increase your deductions for that year.
Take Advantage of Section 179 Deduction
Section 179 allows you to deduct the full cost of qualifying equipment and assets in the year of purchase, instead of depreciating them over time. Be aware of the annual deduction limits and consult with a tax professional to make the most of this deduction.
Consider Hiring Incentives
Investigate tax credits and incentives offered by your local and federal governments for hiring certain types of employees or for conducting business in specific geographic areas.
Retirement Plan Contributions
Contribute to tax-advantaged retirement plans, such as a SEP IRA, SIMPLE IRA, or 401(k). Not only do these contributions help secure your financial future, but they can also provide valuable tax deductions.
Review and Amend Past Returns
If you've missed out on deductions or credits in previous years, you may be able to amend your past tax returns to claim those benefits retroactively. Carson Thorn, a reputable Raleigh CPA at C.E. Thorn, CPA, PLLC, can assist with this process.
#5 - Hire an Experienced Small Business Tax Preparation CPA
Working with a Raleigh CPA can be a valuable asset for small business tax preparation. A CPA can offer niche knowledge and industry-specific insight to help you navigate the complexities of the tax code, optimize your tax strategy, and ensure compliance with tax laws.
Tailored Tax Strategies
A CPA will assess your unique financial situation and business goals to develop tax strategies customized to your needs. They can help you navigate complex deductions and credits specific to your industry.
Time and Resource Savings
Small business tax preparation can be time-consuming, especially for small business owners with limited resources. Hiring a CPA allows you to focus on running your business while leaving the tax complexities in the hands of a qualified professional.
Minimized Errors and Omissions
A CPA's attention to detail significantly reduces the risk of errors or omissions on your tax returns. This lowers the chance of receiving an IRS notice or facing penalties due to mistakes.
A CPA is not just a seasonal resource– they can provide year-round financial guidance, assist with quarterly tax estimates, and offer advice to optimize your finances at any time.
Peace of Mind
Knowing that your taxes are being handled by qualified small business tax preparation professionals can offer peace of mind, allowing you to concentrate on growing your business and pursuing your business goals.
Contact C.E. Thorn, CPA, PLLC for Small Business Tax Preparation in Raleigh, NC
Are you ready to have your small business taxes prepared by a Raleigh CPA? If so, C.E. Thorn, CPA, PLLC, has been providing tax preparation services to small businesses in the greater Raleigh area since 1988 and he can assist your small business as well. Reach out to our Raleigh Certified Public Accounting Firm today to discuss your accounting needs.
Take the stress out of tax season and let us handle your tax planning and preparation, while you focus on growing your business. Whether you're a small business startup, a growing enterprise, or an established company, we tax strategies that suit the needs of your industry.
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