You have just finished your 2014 taxes. It’s time to sit back, kick up your feet, and relax, right?
WRONG!
If you haven't been keeping up with your books for this year, you are already four months behind.
You’re not going to wait until January again and try to recreate all your expenses, income, and deductions like you did this year, are you?
So here are some post tax season do's and don’ts to make sure you keep up with your bookkeeping for this year. We’ll start with the don’ts.
Don’ts
1. Don’t Try to Recreate Your Entire Year After It’s Over
Trying to recreate your bookkeeping after the end of the year almost guarantees you will pay more tax than that for which you are legally responsible. You aren’t going to remember all the times you paid cash for parking at the airport or the mileage you accumulated for business use of your car.
Filing for an extension is not going to help you. If you file an extension, you still have to pay an estimate. If you’re estimate is low, you open yourself to penalties for underpayment. It is much better to keep your books up to date throughout the year.
2. Don’t Try to Estimate Your Numbers
Trying to estimate those expenses makes you vulnerable in case of an audit. The IRS auditor will not take your word when you say, “I spent about $10 each week on postage for my business,” unless you have receipts or other proof.
Contrary to what you think, you can’t keep all your information in your head. Even if you could, the IRS will want to see a record of all those transactions. Documentation means validity. Everything else is open to opinion.
3. Don’t Try to File Your Taxes Without the Help of a Professional
Even if you have been filing your own taxes for years, if you haven’t made it your job to stay abreast of the changes to the tax laws, you are likely overpaying, or even worse, exposing yourself to additional interest and penalties. Tax laws change every year and you can’t keep up unless you focus your full attention on it. It is helpful to shift the responsibility of staying current onto a professional.
The US Tax Code currently has 73,954 pages. Even IRS agents don’t understand it completely. Unless you have someone who can defend your calculations with knowledgeable arguments, you will have to take the IRS’ word when they tell you a deduction is disallowed. A professional who knows the laws can cite the applicable sections of the code that authorizes your deductions and credits.
Getting help from a tax professional doesn’t necessarily mean you need to pay a tax preparer. Here at the Bottom Line, we can assist clients with our tax strategy sessions where you have the opportunity to ask a tax professional questions about anything tax related that you might want to know, even if you are self-preparing your return.
Do’s
Now that we know what we shouldn’t do, let’s talk about those good habits to develop when it comes to your accounting.
1.Pick a Day Each Week to Update Your Bookkeeping.
Tax preparation is just part of the reason you do accounting. “Knowing your numbers” is something all business persons must master if they are to be successful. You should be able to tell a stockholder, an investor, or a silent partner where the business stands anytime theyask. You won’t be able to do that unless you have a firm handle on the changing numbers from week-to-week.
It is not enough to just know the gross revenue. You need to know the net profit or loss each week, what it costs to acquire a new customer and what a typical customer spends, what your expenses are, and, if you are a retail business, what it costs to manufacture or purchase your product and what you sell it for.
The added benefit of keeping abreast of your numbers is that it makes tax-time a breeze. You don’t have to dig through a shoebox looking for receipts from March in the month of December. You can just print the reports you need for your tax preparer and return to your day-to-day operations.
2.Pay Your Estimated Taxes Each Quarter Based on Your Current Profit
The IRS requires most businesses to file a quarterly estimate of the taxes they will owe four times each year. To avoid penalties and interest, you must make these payments each year on April 15th, June 15th, September 15th, and January 15th. (When the 15th falls on a weekend or holiday the dates are adjusted accordingly.)
When you file your taxes with quarterly estimates, you are given tax coupons to file each quarter for the upcoming year. The amount on these coupons will be based on your profits from the previous year. Since the revenue your business actually earns varies from year-to-year, you should pay based on what your business made for that quarter, rather than what is projected based on the previous year. This keeps you from overpaying or underpaying your quarterly estimates.
3.Get Advice from Your Accountant When You Need It
Don’t wait until tax season is upon you again to ask for help if you have a question during the year. If you have a question about the best timing to purchase an asset or computing your quarterly estimate, don’t just dump it on the desk of your tax preparer and hope they can figure it out. It is often too late to make adjustments at that point and you will just have to suffer whatever consequences result from your poor judgement.
Staying in touch with your accountant during the year will be an incentive to keep your bookkeeping current and will help you have everything in order at the end of the year. It might be ideal to have your accountant check everything each quarter to ensure your figures are correct and you’ve not forgotten anything. The money you spend to ensure you are on track for the year will be well worth it if it takes the stress out of tax season.
The Bottom Line
It is very unhelpful and will probably cost you more if you continue to give your tax accountant additional receipts or make adjustments to revenue after you have submitted your books for taxes at the end of the year. Ensure you have everything complete and in order before turning it all over to your tax professional.
