Because today’s small businesses have to compete on a global scale, it’s imperative that they do everything they can to optimize profitability and minimize risk. To that end, owners should maintain meticulous files so that their tax returns can be easy, precise and as financially beneficial as possible. Here are a few tips on how to keep records that will allow your company to save big money come tax time.
Keep personal and professional records separate
According to the U.S. Small Business Administration, 70 percent of American small businesses are sole proprietorships. Consequently, many of these founders may not feel the need to completely separate their personal spending from their business purchases. However, come tax time, disentangling personal and business financial records will be a major pain. Moreover, mixing records increases your risk factor for incorrectly tabulating your potential tax liability. To avoid these headaches, maintain separate files for your personal expenditures and business expenses.
Digitize your records
In the event of an audit, the Internal Revenue Service can demand documentation for the last six years of your company’s tax filings. As such, you should maintain tax records for at least that amount of time to limit your risk factors for incurring costly penalties. It’s also a good idea to maintain digital copies of those records as a redundancy in case your paper tax documents get lost in a move or natural disaster.
Don’t use cash
When making small dollar business expenditures, you may be tempted to pay with whatever cash you have on hand. However, this perfectly reasonable choice could have serious consequences down the line. Cash doesn’t create an automatic paper trail the same way the use of a credit card does, and without the proper documentation to back them up, it’s inadvisable to claim those expenditures as deductions on your company’s tax filing. To ensure that your company gets the highest tax return possible, pay for those ink cartridges or business lunches with the company card.
Hire a professional
As a small business owner, your focus is probably always split between many things such as CRM, inventory, networking and pursuing new leads. Accordingly, you probably don’t have a lot of time to keep up with all the small and significant changes made to the tax code every year. That is why it’s a good idea to hire a CPA to do your company’s tax filings. It’s their job to know about all of those deductions you never heard of and to make sure they’re applied to your returns. Many professional accountants will also offer a protection plan related to their services that will see them handle the IRS on your behalf in the event of an audit. When it comes to something as important as taxes, it pays to be safe, not sorry.
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This article was written by Mario McKellop for CBS Small Business Pulse