Now is the perfect time to perform a mid-year review of your business activity, including your tax liability. Staying on top of these five things throughout the year will help you save time, money, and make tax time much smoother.
1. Expense receipts
When it comes to being a business owner, it’s imperative to have detailed records of all your business transactions. Keeping your receipts organized allows you to track expense details and quickly prepare items for your tax return later on.
But if you have yet to get organized, don’t fret. There’s still time to catch up on the first half of the year. And thanks to our digital world, you can easily snap a picture of your receipts and store them on your computer for safekeeping.
2. Updated income and expense records
Seven months of the year have gone by, which means you should have seven months’ worth of business activity recorded somewhere. Whether you’re using a software program or an old-fashioned spreadsheet, keeping meticulous records of your income and expenses is beneficial for your business in many ways.
Aside from giving you a clear view of your cash flow, good records help identify ways to maximize your deductions and estimate quarterly tax payments. Both of which are vital in effectively managing your tax bill.
3. Separate personal and business finances
Once you start earning regular business income, it often makes sense to open a bank account or credit card that’s used solely for business purposes. Not only does it simplify tracking your business income and expenses, but it gives you a central location to refer back to when it comes time to file your tax return.
4. Quarterly estimated tax payments
Quarterly estimated tax payments (QETP) happen four times a year, and the next due date is in September. But before you stress about parting ways with your money, you should understand how those payments benefit you in the long run.
Paying quarterly helps you avoid a big, unwelcome tax bill when you file. Not to mention, failure to stay current with your taxes throughout the year could result in the IRS issuing you a penalty. And no one wants to pay more than necessary.
Prepare for the next QETP by estimating your taxable income, deductions, and credits for the year. Last year’s tax return can act as a guide. Once you have a solid estimation, calculate your income and self-employment tax to determine what you should pay.
5. Deductions to lower taxable income
After reviewing your cash flow, it’s time to consider investing back into your business. Whether it’s purchasing a piece of equipment or expanding your advertising efforts, many investments have tax advantages. Business owners can generally claim equipment and advertising costs as deductible expenses on their tax returns.
If you’re looking to lower your taxable income, investing your money in those areas may be a smart business decision. For example, you are allowed to deduct the cost of equipment in full up to a set dollar amount. If you have a particularly profitable year and are bumped into a higher income tax bracket, timing your equipment purchase and deduction for that year will reduce your taxable income and help keep you at a lower tax rate. Just remember all expenses must be solely used for business purposes to qualify as a deduction.