Year End Questions for Small Business Owners

 In Tax Planning

Year-end can be one of the most stressful times of year for small business owners. Most people experience some amount of stress during the holiday season, but for small business owners, there are additional bookkeeping, accounting, and tax planning concerns. Much of this stress is caused by the fact that options decrease when the year ends. But the stress can be mitigated by working with a bookkeeper, accountant, and/or tax practitioner throughout the year so that there is no need to scramble to put procedures, plans, and strategies in place at the very end of the year. But the year isn’t over quite yet—and better late than never!

Here is a list of some of the questions that small business owners may want to think about as the end of the year approaches.

Are My Books Up to Date?

The most important consideration that small business owners should think about at year-end is whether they have accounted for their income and expenses throughout the year. Some business owners may use QuickBooks, others may use Xero, and the smallest of businesses may use an Excel spreadsheet. There are also several types of industry-specific software that small business owners can employ to track their business transactions and calculate their income. Regardless of the method used, it is important to keep your small business books up to date.

Not keeping your books for your small business up to date can result in unfortunate consequences. Some of these are lost tax deductions, late tax filings, irresponsible spending, and higher tax preparation costs. Not maintaining books and evaluating financial results can also result in a business not reaching its full potential. When you don’t know what is coming in and what is going out in real-time or at least month by month, you lose the ability to make decisions that can increase profits or mitigate losses.

If at this point in the year your books are not up to date, it may be time to hire a bookkeeper or accountant to handle this for you. This will enable you to get caught up quickly and prepare for tax time, which is just around the corner.

Who Is Preparing My Tax Returns?

If your books are updated and ready to go, the next question you may want to ask is whether you will be self-preparing your tax returns this year or whether you will utilize a professional tax preparer. Many taxpayers who are employees and have simple returns can prepare and file their own tax returns. Some small business owners can self-prepare as well, especially if they are Schedule C filers with relatively simple operations.

I generally do not recommend that taxpayers self-prepare business returns due to the complexity of the tax forms. And it’s not because I like to generate business for myself. 😊 It is because the overwhelming majority of self-prepared business returns that I’ve seen have had significant reporting errors. The overwhelming majority of clients that I assist with taxpayer representation and tax resolution are taxpayers who decided to self-prepare their returns. It is generally better to have a paid preparer look at everything, let you know of potential concerns, and talk those things out before that information is filed and reported to the IRS. Taxpayer representation for an IRS matter is generally more expensive than tax preparation.

What Will My Tax Liability Be?

Most people don’t like surprises when it comes to taxes. Wouldn’t it be great to know whether you are going to owe, how much, and whether there is anything you can do about it before the year is over? Many of my clients are already looking at this. Some of them look at it quarterly and others contact me in November or December. Although it is optimal to have an idea of what things look like throughout the year, the next best thing is at least knowing what to expect before the year closes and certain options for reducing taxes are off the table.

Are There Ways to Reduce my Tax Liability?

One of the most advantageous aspects of small business ownership is that there is oftentimes a way to reduce your tax liability. Many of these methods are not available to W-2 employees. It could make sense to purchase necessary equipment or supplies, start a retirement plan for your business, incorporate some fringe benefits, move to a different entity classification (C Corporation, Partnership, or S Corporation), or even employ some advanced tax planning strategies in certain cases. Exploring these possibilities before the end of the tax year can result in tax savings for the current year as well as the next tax year. Several of my clients are looking at optimizing their tax situation during this time of year through comprehensive tax plan engagements, and these clients are reaping beneficial tax savings both for the current year as well as the next year.

Have I Paid Enough Taxes Throughout the Year?

Even if you have not contacted your CPA since 2020 taxes were filed, if you are a small business owner with a profitable entity, your CPA probably prepared some safe harbor estimated tax payments for you to pay each quarter. This is a great time of year to see whether you have made those payments as directed or whether you need to get caught up. If you feel like 2021’s income is significantly lower than what it was in 2020, you may want to contact your CPA to determine if you can pay in less than what was calculated at tax time. If your income is higher in 2021, you may want to find out how much you’ll owe so that you don’t have a surprise tax bill in the coming months. Most small business owners change their behavior if they know are going to owe. Maybe it’s best not to take that expensive trip or go overboard with Christmas presents if there’s a $20,000 tax bill around the corner. With tax debt, it is always better to know sooner rather than later.

 

If after reading this article, you have found that you are not as far along as you’d like to be for year-end, not to worry! Feel free to contact me using the form below and my firm would be happy to assist with the bookkeeping, accounting, and/or tax planning assistance that you need. Happy Holidays!

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