If you're like most small business owners, you're digging through a shoe box of receipts, preparing to file your 2010 tax returns. And this year, like last year and the years before, your mutterings are part prayer that everything is indeed in the shoe box, and part promise to do better next year.
The problem is that it's already next year, which means you've probably already started a new shoe box collection of receipts.
Plan Now for Next Year's Tax Season
"Once you've completed 2010 taxes, set aside time -- while this year's paperwork challenges are still fresh -- to establish better habits for 2011," said Alice Bredin, small business advisor to American Express Open, a credit card company and the home of AcceptPay, an online electronic billing and payment acceptance program for small businesses. "A little work now on better tracking income and expenses will make next year's tax season go much more smoothly."
Certainly starting early makes it easier to file your taxes, but there is another striking advantage as well. With all the tax changes for 2011, you can get many of the things you previously thought you couldn't afford -- such as more employees, new equipment and more-affordable health insurance.
However, those tax benefits come with strings, primarily in reporting and percentage-based requirements. Therefore, you need to start tracking your actions now. The easiest way to do all this is to use accounting software and to plan ahead using these helpful tips.
10 Easy Steps to Prepare for 2011 Taxes
1. Sync Small Business Accounting Software with Your Accountant
Sync your small business accounting software with your accountant's, which simply means either use the same software he or she does or a compatible program. By doing so, everything from payroll taxes to quarterly P&L statements and end-of-year tax filing becomes automatic.
Several software programs allow your accountant access (with your authorization, of course), so the accountant can access your books and do his work without you having to do anything. Other software programs let you send the data to your accountant with just a few clicks. In any case, you want to use accounting software that provides an IRS-approved electronic audit trail, such as Peachtree Accounting or QuickBooks, so that even a tax audit becomes a no-brainer, less-stressful affair.
2. Use Online Banking
Online banking can help you keep records straight for tax time and help you stay on track from month to month. Most accounting software lets you automatically import data from your online checking account, but there are other ways to use online banking info, too.
"Most banks will let you download your transactions into an Excel spreadsheet or some type of electronic, sortable format," said Karla Dennis, a Licensed Enrolled Agent and CEO of Cohesive, a California-based tax preparation and consultancy firm. "If you download your transactions using your iPad, desktop or laptop, you can then put a 'T' next to the items that are tax related. If you do this every month, you will have a nice record of tax deductible items when it's time to file your 2011 tax return," she said.
3. Record Everything Electronically
"Scan bank statements (if you're not using online banking), vendor statements, receipts, credit card statements, everything. Scan it all as soon as you receive it," said Andrea Moe, senior director of product management and marketing at Sage, the makers of Peachtree Accounting. By creating an archive of all your records, you'll always have everything you need, anytime you need it.
4. Backup Electronic Records
To prevent financial ruin as a result of man-made or natural disasters, or even from a spiteful employee or an errant finger stroke, make sure you backup everything routinely and regularly. "Don't just back it up on a flash drive or CD, back it up to a remote location," said Moe. "That way, if your building burns or floods, your backup isn't destroyed along with your primary records."
There are a number of programs that can automatically back-up everything on your computer --including some that come pre-installed on new computers such as Dell DataSafe Online -- and others that you can downloaded, such as Mozy and Carbonite. Check to see if your accounting software supplier also has an automatic backup service -- several do. The added advantage to backing up online is that you can access your financial info any time -- even when you're away from the office.
5. Track Health Insurance Policies
The Small Business Jobs Act entitles a sole proprietor to reduce self-employment tax by the amount of deductible health insurance premiums. "For small businesses that pay at least half of their employees' policies, there are substantial tax credits available. Check with your accountant for details, but do track policy costs throughout the year. That way you'll have an exact record if you change insurance companies or coverage.
6. File Online -- It's the Law
"Small businesses are now required to file 941 forms (quarterly payroll taxes) and unemployment forms electronically," said Moe. "If you're not using automated accounting software or a third-party payroll company, you may find it really difficult to file these electronically." Be warned, the fines for failing to file online and on time can be significant.
7. Use Electronic Calendars
Odds are you already use an electronic calendar on your computer or smartphone. You can also use it to jog your memory as to which trips and meals qualify as tax deductible -- thus giving you a good way to double-check your deductions at tax time.
"Make a note of any appointment that is tax related by indicating so with a 'T' right in the subject line," said Dennis. "At the end of the year, you can print out your appointments, and anything with a 'T' next to it is something you need to follow up on for your taxes."
8. Profit by Hiring
In the current economy, many businesses are reluctant to hire employees. However, the government is offering employers a $1,000 tax credit for each employee hired. "The business owner must retain the new employee for at least a year," said Mike D'Avolio, senior tax analyst at Intuit, the makers of QuickBooks.
"Also, the employee's wages during the last 26 week period must equal at least 80 percent of the first 26 week period." In order to benefit from this tax credit, it's important to track length of employment and to calculate earnings against this rule a task some accounting software will do for you automatically. In comparison, the shoe box won't track this at all, and you can end up working short-handed and paying more taxes.
9. Buy More Assets with Tax Credits
The government is encouraging small businesses to purchase assets by expanding several incentives. Businesses can claim a 100 percent bonus depreciation deduction for new assets purchased in 2011. "Personal property, such as machinery and equipment, qualifies; but real estate does not," said D'Avolio.
Even though the purchase of used property does not qualify for this 100 percent bonus depreciation provision, D'Avolio said it does qualify for a section 179 expense deduction. There is a $500,000 limit for 2011. Certain types of real estate qualify for the section 179 expense deduction with a $250,000 limit.
10. Avoid Huge Penalties for Late Reporting
According to Greatland, the parent company to tax-filing software such as FileTaxes.com and speedEfiler, the Small Business Jobs and Credit Act of 2010 will increase 1099 and W-2 reporting penalties across the board. This will apply to information returns filed on or after Jan. 1, 2011, and therefore, all payments made in 2010.
The maximum failure-to-file penalty increases to $500,000 (up from $100,000) The maximum penalty for issuing corrections within 30 days increases to $75,000 (up from $25,000) while the penalty for issuing corrections more than 30 days past the due date, but before Aug, 1, increases to $200,000 (up from $50,000).
Additionally, a new provision in the healthcare reform legislation is aimed at improving reporting and closing the tax gap. "It will require all businesses to not only issue a 1099 to document income paid to contract workers, but also issue a 1099 form to any business from which they purchase at least $600 in goods or services," said Bob Nault, Greatland's CEO. "Some estimate that this change will have the average business seeing its 1099 reporting increase tenfold -- a burden expected to only be compounded next year if businesses don't begin to prepare in 2011."
Accounting software can automatically issue these 1099s for you. If you fail to start issuing 1099s and W2s according to these new laws, the penalties could rob you of your business. In the end, you could be left with nothing but your shoe box of receipts.
Pam Baker has written for numerous publications including, Institutional Investor magazine, CIO.com, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine and the NY Times.
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