Small businesses may not think much about filing taxes until the calendar turns and deadlines approach, but getting a jumpstart on tax preparation in the final quarter is a great way to support your business’s health and growth.
Preparing taxes can be – and often are – the proverbial buzzkill. They’re a necessary evil prone to sparking headaches, stress and costly realities. Yet, taking a proactive approach to taxes, especially throughout the calendar year’s fourth quarter (Q4) can spur a more streamlined and efficient effort that can save time, cash and sanity.
“When it comes to taxes, so many business owners don’t want to think about them, talk about them or plan for them, but there’s a tremendous amount of benefit that can come from getting a jumpstart on end-of-the-year taxes,” said Drew Wolf, a certified public accountant (CPA) with Minnesota-based Boyum Barenscheer.
How to Craft a Proactive Plan
Check in with your accountants in the fall (meaning ASAP) to get a complete checklist of the items needed for tax preparation. With that in hand, operators can start to assemble all the figures and documentation necessary for a streamlined filing process. And if it’s not you doing this work, now is the time to determine who will be overseeing this process.
“The biggest headaches each year come from the books and records not being in order,” explained Marshall Varano, a tax partner at the San Diego office of CohnReznick, one of the nation’s leading accounting firms. Varano, who specializes in the hospitality sector, recommends business owners connect with their bookkeeper to gather updated numbers that can then be shared with the accountant during an early Q4 meeting to estimate the year-end tax burden. By mid-December, small business owners should check in with the bookkeeper again to make sure the books are current and will be successfully closed when the calendar turns.
“It’s true you can always get an extension, but the tax due will be the tax due regardless,” Varano said.
By January’s end, businesses must also begin issuing 1099s to vendors from the previous year. Wolf urges operators to confirm they have complete and accurate W9s on hand by year end. If you don’t, you’ll be chasing those down in January under the deadline for submission. “I go back and forth with clients on this documentation more than anything else, and it’s a complete hassle for all of us,” Wolf said.
Getting ahead of tax preparation can set you up for success in the year ahead. It can help you:
Improve planning and forecasting
As Q4 gets underway, business owners should meet with accountants for an earnest discussion about the organization’s performance and to gauge the year’s estimated taxes based on year-to-date performance, its trajectory and previous Q4 results. Mapping out a tax bill can inform planning for the following year, including whether ownership can renovate the business grounds, purchases equipment, hire employees, expand or even sell. “The sooner you can get a handle on taxes, which can drastically affect cash flow, the better you can plan for the year ahead,” Wolf said.
Identify opportunities for cash-boosting programs
Tax planning during Q4 gives ownership a multi-month window to address potential problem areas or leverage existing tax-year programs. For example, many business owners exist as partnerships or S-corps and extract money from the business throughout the year as distributions. If owners do not have a sufficient tax basis to cover these distributions, then the distributions become taxable income. “But if you check with your CPA during the fall and find you’ve taken out too much in distributions, you have months to fix this potential headache,” Varano said. Owners can also take advantage of tax credits or other capital-boosting programs. Bonus depreciation, for instance, sat at 100% for 2022. Starting in 2023, however, it decreases 20% each year. “So, if you think you’re going to purchase equipment in early 2023, consider doing it before 2022 closes to capitalize on bonus depreciation now,” Varano said.
Avoid unnecessary communication with the Internal Revenue Service (IRS)
Errors on tax forms can draw the attention and ire of the IRS, which any smart business owner tries to avoid. The earlier you send your accountant financial statements, the earlier they can spot miscues and fix them, said Varano. After all, there are some time-sensitive items you must address by year’s end. “Once the books are closed, though, it’s tougher to fix things,” he added.
As February rolls into March and tax preparation season intensifies, accountants are then hustling to complete work for multiple clients, which increases the likelihood of human error. If, however, business owners can collect and organize information for their accountant by mid-January, then they gain an early spot in line with fresh accountants. “Mistakes do happen, but a more controlled process decreases the risk of reporting errors and expedites the turnaround time,” Varano explained.
3 Tax Credits to Know
Business owners should always check with their CPA to ensure they are investigating three critical tax credits:
- Employee Retention Credit (ERC): The federal government launched the ERC during the pandemic to incentivize businesses to keep employees on their payroll. Even businesses that did not take advantage of this previously can file an amended return or claim the credit for 2023.
- Work Opportunity Tax Credit (WOTC): The WOTC is authorized until Dec. 31, 2025, and allows small businesses to claim up to $9,600 when hiring a qualified employee from one of nine target groups, including military veterans, ex-felons and so-called “summer youth employees.”
- Retirement Plans Startup Costs Tax Credit: Small businesses with 100 or fewer employees that received at least $5,000 in compensation from you for the preceding year may be able to claim a tax credit of up to $5,000 for three years. This money would go towards ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.
This article was adapted from a piece initially published on Pizza Today, written by Daniel P. Smith.