Every small business owner wears dozens of different hats. One of those includes the hat of accountant and bookkeeper. Here at Vyde we help dozens of small business owners build their businesses, because we appreciate the passion they have for their clients and their product and/or services they provide. Because we spend a lot of time with “the books” and because we’re certified CPAs we’re sharing our top year end tips that will help guide you to a successful tax season.
You can watch the complete webinar where we cover our top tips, or read the summary below. We’ve put in start times for each section so you can watch the webinar in it’s entirety or just listen to the year-end tips you’re most interested in. Here are a few things we look for while working on our client’s books and things we think you should look at too:
Unclassified transactions / Miscellaneous transactions
(start watching at 1:30)
One of the biggest questions we get asked by clients is if their unclassified or miscellaneous transactions can be an audit flag. And the simple answer to that question is yes. Unclassified or miscellaneous transactions are simply those that aren’t categorized or tagged with additional information. Simply put, you’re bookkeeper or accountant isn’t sure what the money was spent on because there’s not enough information to identify it. It’s not bad to have these transactions, but for our client’s books we try to keep this category to $3,000 or less. Obviously, this rule is scalable. If your total revenue is significantly larger, then the amount you have in this category could be more than $3,000. That said, it’s probable that large expenditures, especially those that aren’t categorized clearly, are going to run the risk of throwing an audit flag.
TIP: take a look at your unclassified or miscellaneous transactions. Review your books or bank statements now and identify as many of them as you can. If you do your own books, make notes and gather receipts for these or provide them to your accountant or bookkeeper. Working on this before year-end is easier than trying to remember right before the tax deadline and already working/spending for another year.
(start watching at 3:30)
Loans are treated differently than general income. Because of this, it’s crucial that you note when loan money comes into your account and notify your bookkeeper/accountant about all loans. Loans aren’t taxable income, and it’s important to make sure the interest expense is broken out from the principal payment, so you’re sure you’re getting all the deductions you deserve come tax time. The reason we suggest this as a year-end “to-do” is because it’s easy to gather the information at that time, with your year-end loan statement.
TIP: Many banks send out paper forms for year-end statements and others are completely paperless. Regardless, find out where you can access your year-end loan statement for all of your current loans and put them together in one place. You may even want to pass these off to your bookkeeper or accountant if you have one, or hold a short meeting to make sure they’re up to date on the specifics of your loans.
(start watching at 7:50)
If you’re been in business for very long, or even if you haven’t, you’ve probably heard the advice to keep your business and personal accounts separate. It’s a great rule to follow, but it’s not always as easy to implement. Plus, there is always the action of pulling a salary or paying yourself from your business that falls into the grey area of this rule of thumb. Your accountant or bookkeeper will probably use words like owner’s distributions or owner’s draws – simply put, the money that falls into this area includes when you write yourself a paycheck, transfer money to your personal account from your business account or even make personal transactions with your business account or business card. You’ll want to listen to the webinar where we outline this fully and talk about putting money into your business, which falls under owner’s contributions.
TIP: because this is a detailed process, we’d highly recommend watching this section of the webinar or asking your accountant or bookkeeper about it directly. If you know that you’ve purchased personal items/services from your business account, take a few minutes to write them down and included exact dates and numbers if possible. This will make searching your bank statements easier for either you or your accountant.
(start watching at 17:03)
Health insurance is something that’s highly specific because of the variety of plans but also because the rules are written just a bit differently by the IRS. What you pay for health insurance shows up differently than a normal expense on your tax return, and filing is different based on the type of business entity you run.
TIP: take a few minutes and make sure you know the type of business entity you run, plus the forms you’ll need to file for it. Then make sure you’re including what you pay for health insurance correctly by reading through the IRS rules or reviewing this information with your accountant or bookkeeper. Year-end is a great time to ask questions and make changes if needed, because it’s open enrollment.
Hopefully you’ve gleaned a few great tips to help you finish the year strong. If you have additional questions, we’d love to chat with you.
FAQs for Year-End Tax Tips for Small Business:
Are unclassified transactions a potential audit flag?
Yes, unclassified transactions can raise red flags during audits. It’s advisable to categorize them properly, aiming to keep this category to $3,000 or less, facilitating easier tax preparation.
How should small business owners handle loans for tax purposes?
Loans aren’t taxable income, but it’s essential to segregate interest expenses from principal payments. Collect year-end loan statements and ensure your accountant or bookkeeper is aware of all loans for accurate tax reporting.
What does managing equity entail for small business owners?
Maintaining separate business and personal accounts is crucial. Properly categorize owner’s distributions or draws, including salaries and personal transactions, to avoid complications during tax filing.
How does health insurance impact taxes for small businesses?
Health insurance expenses have specific tax treatment, varying by business entity and IRS regulations. Ensure proper filing and documentation, consulting with your accountant or bookkeeper for clarity.
Why is year-end an opportune time for tax-related inquiries and adjustments?
Year-end allows for review and preparation before tax deadlines. It’s an ideal period for clarifying tax rules, gathering necessary documentation, and making strategic adjustments for optimal tax management.