The aftermath of the COVID-19 pandemic has left a significant impact on the economic landscape. About 12% of small business owners consider financial stability their most difficult challenge, falling just behind business loss and customer attraction. Unsurprisingly, taxes, the inevitable year-end bill, rank as the second most substantial concern for small businesses in the United States. Here are some tax tips that can help small business owners save.
Grasping Financial Lingo
Many taxpayers need a new dictionary to decode their tax returns. Accounting comes with its unique set of terminologies. Dedicate some time to learn jargon so you can understand your business’s financial status.
Here’s a quick breakdown of common phrases that might appear on your balance sheet:
– Revenue: The income generated from product sales.
– Cost of Goods Sold (COGS): The expense of producing the products sold by your business.
– Gross Profit: The amount remaining after subtracting COGS from total revenue.
– Net Sales: The overall profit after deducting all expenditures from total revenue.
Separating Business and Personal Finances
The first step when launching a small business is establishing a separate bank account.
Having distinct bank accounts for business and personal transactions simplifies tax time. Not only will you possess clean, precise records for deductible expenses, but personal transactions will remain confidential.
Maintaining Precise Records
Speaking of accurate data, navigating tax season becomes smoother with precise reports. Use bank statements to reconcile income and expenses with receipts or invoices. You can opt for accounting software to automate this process (more on this later) or utilize a free tool like Shopify’s invoice generator.
Dan Luthi of Ignite Spot points out a standard error with misrecorded expenses, such as free samples. According to Dan, occasionally, people will adjust and mark it as inventory shrinkage, when, in reality, it was a marketing expense.
Credit card points are also prone to misrecording. Scott Scharf, the co-founder of Catching Clouds, an Acuity company, states that when buying $1 million worth of inventory, the accumulated points become substantial. This means that small business owners can travel first class on points while on vacation.
Embracing Accounting Software
Still relying on spreadsheets to manage your small business taxes? The risk of errors is significantly higher. Human mistakes can lead to inaccurate tax returns—a scenario best avoided.
Dan Luthi from Ignite Spot emphasizes that Excel won’t provide people with wholly accurate information. And, it won’t generate financial statements or identify a company’s top vendors or purchases from them this year. Instead, companies should invest in accounting software.
By embracing these tips, you can ensure your small business remains financially sound during tax season.
