before you know it, the year 2000, and our individual witnessing of the turning of a new century, will be but vibrant memories to savor. And just as soon as the fireworks are over for 2001, we'll all be in the thick of the dreaded tax season.
Thinking about taxes now may seem like seeing Christmas decorations before Thanksgiving -- too much too soon -- but a little accounting housekeeping now can save hours of stress later when you're trying to beat those first quarter deadlines. From basic business accounting software packages to e-filing tax services, there are a host of tools to help take the discomfort out of the tax preparation process. Even if you decide the actual calculation of deductions, payments, and refunds is best left to the experts, the following tips will help put your business on the right track.
If you're still using the shoebox method of accounting, you already know you're on borrowed time. But it's never too late to make the switch. Today's accounting software is so simple and intuitive that it makes it easy to keep good records. It also makes it easier to do all those accounting housekeeping chores. Many packages coordinate with tax preparation software and electronic filing services, and it will be a lifesaver in the event that you get audited.
When using accounting software to prepare for tax time, the most common error you'll want to look for is incorrect postings. We all put entries in the wrong account or list a loan as an expense instead of a liability. All of the popular software packages make it simple to find those errors. Run general journal reports, either for all your accounts or one at a time, and look for entries that seem unusual or obviously misplaced. Run finance reports like "balance sheet" and "profit and loss" and look for things that look out of whack. Make corrections right away.
Next, check the tax classification of each of your accounts. Usually that entails double-clicking each account in your account list and reviewing the tax classification when the dialog box pops up with specific details. Those classifications are there so that when you're ready to export your year-end numbers over to tax software, it automatically sends them to the correct line in the tax form. For example, in TurboTax from Intuit, you click a button to import from Quicken or QuickBooks (only from the most recent versions, though) and it automatically pulls only those numbers that are needed -- as determined by the tax classifications you've chosen for each account. Before you buy tax software, check to be sure it will import files from your accounting software, or this otherwise valuable function will be of no use.
LOOK AHEAD, LOOK BEHIND
Whether you report on a fiscal or annual year, you already have months of income and expense information, so export those current financials to your 1999 tax software (most 2000 versions won't be out until December) to get a sense of this year's taxes. All of the popular tax software include tax planners and what-if capabilities.
You should also consider adjusting your income. If your business is growing and you expect to be in a higher tax bracket next year, you may want to accelerate some of your income into 2000. Contact customers and offer a special discount if they pay before the end of the year. It will increase your taxes for this year but could save you money next year.
On the other hand, if you had an exceptional year but know next year is likely to be back to normal, look at ways to defer some of your income until next year when your tax rate will likely be lower.
Talk to an accountant before making a decision, though, because how you handle income is at least partially determined by the accounting method you use. Cash-based and accrual methods each handle income differently and determine whether delaying or accelerating will work for you.
Did you pay enough in estimated taxes or should you make a quick payment to avoid late penalties? What about sales tax? The latest version of Peachtree, due out now, has reporting features and wizards that tell you how much sales tax you have taken in and how much you owe.
Payroll is everyone's nightmare, and anyone who manages the process in-house will want to carefully verify the numbers. Outdated tax tables can be problematic. Check now to make sure your quarterly tax payments have been accurate to avoid big penalties later.
The easiest solution may be to outsource payroll. Monthly fees not only cover the distribution of checks to employees, but also guarantee that payroll taxes are being paid accurately and on time. In addition to companies such as ADP, Advantage Payroll, and Paychex, the Deluxe Payroll Service from QuickBooks will calculate payroll, file quarterly 941s, and file the necessary year-end reports with the IRS. To help do-it-yourselfers stay on top of the ever-changing codes, QuickBooks and Peachtree both have payroll services that supply updated tax tables throughout the year.
Deciphering depreciation (the current value of a business expense purchased before the current tax year) is one of the most difficult steps in the tax process. The regulations are confusing, the terminology is intimidating, and the calculations are complex. The wizards in the tax software, however, are surprisingly helpful. They guide you step-by-step through the process, but the software does all the heavy lifting.
After listing the item you want to depreciate, and the date it was purchased, you select the type of asset it is (office furniture, vehicles, computers, peripherals). The software then selects the depreciation method that is appropriate to that type of asset. It automatically figures the depreciation and offers advice about whether you should just expense the item or stick with the depreciation.
DESKTOP OR ONLINE
The IRS has made it clear that online tax return filing is far more accurate and reduces the time it takes to get a refund. It may even get you an extension. Initially, only IRS-certified accountants could file electronically, but some tax packages have online versions with services that let you file electronically.
If you can use them, do so, but last year they were limited in the complexity of returns they could handle -- and at press time all the vendors were tight-lipped about this year's capabilities. For example, last year's TurboTax online version lacked all of the necessary home office and depreciation wizards of the desktop version. Similarly, the IRS had limitations on the returns that could be filed electronically. Current information indicates that forms such as 941, 1065, 1041, and 5500 can be filed electronically, but double-check specific capabilities before making any assumptions either way.
Using an Application Service Provider for certain functions can make filing easier. An ASP has all of the software on its Web site, which you access via the Internet and a browser, anytime, anywhere. Limited advice from an accountant maybe included in the monthly fee, so she can monitor and correct your books on a regular, agreed schedule throughout the year, avoiding that year-end sprint to avoid chaos.
These tools will certainly make the countdown to tax day easier, and they should give you peace of mind. But whether you rely on accounting software, an ASP, online filing packages, an accountant, or some combination of any of these, remember you're still the one responsible when taxes are due.