6 Ways Small Business Owners Can Get Ahead of Tax Season
Tax season may still be a few months away, but according to Andrew Turner, a tax manager at Frazier and Deeter, it’s never too early to start preparing.
Thanks to Huntsville’s Catalyst Center for Business & Entrepreneurship, local business owners have the confidence to end the fiscal year strong and be ready for the tax year ahead. In late August, the organization hosted Turner for a free webinar explaining how to manage small business taxes.
Turner said understanding the larger role taxes play in a business can help owners avoid many of the surprises that create tax-related stress.
“Tax affects a number of different aspects of your day-to-day business. The more that we understand, the less likely we are to run into surprises because most tax stress does come from surprises,” he said.
During the webinar, Turner walked business owners through tax considerations at every stage of a company’s lifecycle, from choosing an entity structure and maintaining financial records to managing estimated payments and planning for year-end.
According to Turner, approaching taxes as an ongoing part of running a business can help owners avoid many of the surprises that create tax-related stress.
“I think it’s helpful to think of taxes in general as a system, not as a single event,” Turner said
- Tax planning starts when your business does
Tax considerations don’t begin with a company’s first tax return. Turner explained that different issues can arise throughout a business’s lifecycle, beginning with its formation and continuing through operations, growth and changes, and eventually a sale, succession or closure.
Throughout his presentation, he repeatedly emphasized one principle for new business owners: document everything from the beginning.
“Good record keeping starts on day one,” Turner said.
He also encouraged entrepreneurs to begin developing relationships with professionals who can help them navigate tax and legal questions as the business becomes more complicated.
“As small business owners, I think that it is imperative that you start building that bench of advisors sooner rather than later,” Turner said.
- Your business structure may need to change as you grow
Turner explained that entity choice can affect how income is taxed, what tax returns are filed, and how owners are paid. Changes such as increasing profits, adding owners, hiring employees, bringing in investors, or expanding into other states can all be reasons to reevaluate that structure.
He also cautioned owners against making entity decisions based just on federal tax treatment, noting that state and local tax considerations can change the analysis.
This makes entity selection something owners should periodically revisit rather than a one-time decision made when forming a company.
- Estimated taxes = a cash-flow expense
For entrepreneurs used to working as employees and seeing their taxes taken out of their paycheck, the transition to paying taxes as a business owner can be an unwelcome surprise.
Some small business owners may need to make estimated tax payments throughout the course of the year.
Turner explained that this makes taxes something owners should incorporate into their ongoing cash-flow planning.
“Remember, it’s not an April 15th issue; it’s throughout the year,” Turner said.
He compared the expense to other recurring costs that businesses typically plan for when managing their finances.
“Estimated tax is a year-round cash flow item. It’s like rent. It’s like payroll. If you wait until April 15th, it can create a cash crunch,” Turner said.
The CPA also stressed that estimates are based on profit, not simply deposits into the business, making accurate, timely bookkeeping especially important.
- Good bookkeeping is more than filing taxes
Accurate records can make tax preparation easier, but Turner said good bookkeeping serves a broader business purpose.
He recommended regularly reconciling bank and credit card accounts and keeping financial statements, including profit-and-loss statements and balance sheets, up to date.
Doing this gives business owners a clearer picture of what is actually happening inside their companies.
“This isn’t just about tax. This is about actually giving us information to use to run our business,” Turner said.
Accurate financial information can help owners spot rising costs and determine which customers or areas of the business generate the most value.
- A deduction is only as good as the documentation behind it
While presenting, Turner shared several deductions that can apply to small businesses, including home-office expenses, business vehicle use, travel, meals, and certain equipment purchases.
However, an expense feeling business-related isn’t enough on its own. Turner said owners need to establish the business purpose and maintain the appropriate records.
Turner warned that trying to reconstruct those records after an audit begins can put an owner in a difficult position.
“You didn’t document it. Oh, now we’re audited. Now I have to divulge all these records to the auditor, and I don’t have them. That’s not going to help the case at all,” Turner said.
Throughout the presentation, he advised documenting expenses as they occur rather than trying to recreate their purpose months or years later.
- Don’t wait until tax season to start planning
With the end of the year approaching, Turner said now is an especially valuable time for business owners to consider their tax position.
Around September and October, Turner said his firm begins reviewing clients’ year-to-date profits, projecting fourth-quarter results, and determining whether estimated payments need adjustment.
“I would encourage you to sit down in September, October, November and talk to your advisors about all of these issues and get a good projection,” Turner said.
He also noted that a proactive approach gives owners time to make adjustments instead of discovering problems after the year has already closed.
“Look at everything because that’s the time to do it. Give yourself time to make the changes where you need to,” Turner said.
