We may be wrapping up the 2020 tax season, but in the blink of an eye January will be here. Will you be left scrambling to get your books together again? Too many business owners wait until the last minute to prepare for tax season, which means they inevitably miss out on many strategic tax opportunities. Here are some of the items we recommend tackling now, before they become a major undertaking:
1. Ensure timely reporting and proper classification
This may sound like a no-brainer, but we see businesses falling behind on expense reporting almost every day—especially those that aren’t using an automated system. It is also crucial to make sure expenses are classified properly and that assets are appropriately reflected on the balance sheet.
If you received a PPP loan, ensuring proper classification of expenses related to the loan could mean the difference between complete forgiveness and no forgiveness. Even if your loan is forgiven, you still need to maintain those records in order to comply with loan requirements and be prepared for an audit.
If you’re a Xero user, you can set up rules to properly classify transactions as you reconcile. Xero will also pick up on your patterns over time, which means it just keeps getting more efficient the more you use it. For more about how to harness the power of accounting automation, check out our free online course, 5 Weeks to Better Bookkeeping. Setting up Xero and reconciling your books are topics that are covered in weeks 2 and 3.
2. Stay up to date on regulatory changes and reporting requirements
2020 threw small businesses the curveball of a lifetime, with the only constant being change. Not only are the requirements of the COVID relief programs continually changing, but so are reporting requirements for small business owners and self-employed individuals.
For the tax year 2021, small businesses and independent contractors using online services such as Ebay, Uber, Etsy, and Airbnb will receive a 1099-K if sales were over $600 (up from $20,000). This may come as a shock to some as these platforms are projecting an astronomical increase in the number of 1099-K forms they’ll be required to send. That being said, the tax law didn’t change—the new reporting requirement serves to increase transparency for online sellers and gig workers. This is just one example of many that can pop up unexpectedly at tax time.
Update: Congress has delayed the law requiring e-commerce platforms to report information on workers earning $600 or more, which was a part of The American Rescue Plan Act of 2021. This law has been pushed by one year, meaning platforms such as Airbnb, eBay, and Etsy will rely on the threshold of more than 200 transactions worth an aggregate above $20,000 for 2022 (not $600).
Having a relationship with a trusted, strategic advisor throughout the year can help you stay up to date on the seemingly endless stream of changes. The CPA side of our business regularly posts blogs and social media updates covering these types of topics.
3. Transition to a cloud-based accounting system
Welcome to 2021, where everything lives in the cloud! If you’ve been manually entering expenses, calculating payroll, or keeping inventory in Excel, you’re wasting precious time. As well all know, time equals money. Say goodbye to manual reporting and being tied to your desktop computer, and instead say hello to automated reporting, working where you need to be, and keeping your back office functions secure.
Transitioning to a cloud-based accounting system where your expenses are reported and classified automatically will help keep your books up to date, making sure you are prepared for tax season.
4. Strategic tax planning
Working with your CPA to develop a strategic tax plan could save you thousands of dollars next tax season. A CPA can provide you with a tax projection to see where you currently stand and estimate your taxes due. By doing this early in the year, you buy yourself time to reduce or defer your tax burden. Contributing to charities, purchasing new business and office equipment to take advantage of bonus depreciation rules, and setting up retirement plans for your business and employees are the types of opportunities we look for during tax planning sessions.
If you find yourself overwhelmed with the ever-changing reporting requirements and the never-ending pile of business receipts, it might be time to upgrade your accounting workflows. Contact us to see how we can free up some of your valuable time so you can get back to focusing on what you do best.