It's tax time: The corporate tax filing deadline is March 17 this year; individual tax returns are due next month. What to do first?
Take a deep breath.
That's what tax accountant Scott F. Berger, principal at Kaufman, Rossin & Co., in Boca Raton, Fla., tells his small business clients when they show up, some clutching shoe boxes and shopping bags stuffed with receipts and credit-card statements. They're sometimes sweating and nervous. "They think it's like going to the dentist," Berger says. "I tell them: 'Relax, it's only taxes.'"
Easy for him to say. A February survey of 600 small business owners done by domain registry GoDaddy.com showed that 40 percent of small business owners labeled bookkeeping and taxes the most unpleasant part of owning a small business. Part of the problem might be that more than half still use spreadsheets-or paper and pencil-to track company finances, and 40 percent reported taking six or more hours to complete their returns.
Nearly two decades after small business accounting software hit the market, tax time doesn't have to be so onerous or so scary. Here are ways to make tax prep a little more zen. Have you taken that deep breath yet?
8 Zen Tips for Tax Time
8 Zen Tips for Tax Time
Don't parse every receipt and monthly bank statement, says Wenli Wang, a partner in the tax practice at Moss Adams in San Francisco. "Do some homework, so you know what is deductible and what is not," she says. "When you understand what is relevant to your tax prep, you’ll have a game plan."
"Clients spend a lot of time chasing small deductions. I tell them not to go crazy documenting $5 here or $10 there. Concentrate on bigger expenses that save the most in taxes," Wang adds. "And don’t spend money on unnecessary expenses just to save on your taxes."
Avoid such audit triggers as running a cash business, claiming large deductions on minimal income, and reporting dependent exemptions for people who may not actually be your dependents for tax purposes, says Ebong Eka, a Washington accountant and author of "Start Me Up: The No-Business-Plan Business Plan."
If you report a business loss year after year, you risk having the IRS declare your company a hobby, says Mark MacLeod, an accountant and chief financial officer for FreshBooks. "Filling in your Schedule C with nice, even, rounded numbers in the hundreds or thousands is another red flag," he adds.
Buy an accounting system that automates your back office tasks, including tracking income and tax-deductible expenses. There are free and low-cost software packages available, too. FreshBooks' MacLeod -- who obviously has a dog in the fight -- advises business owners to steer clear of software that's designed for professional accountants. "If it's too complicated, you won't understand it and then you won’t use it," he says.
Spare your sanity by hiring a professional who will do right by your tax return while you work for your clients or drum up new business. "What is your time worth?" MacLeod asks. "If you're a graphic designer charging $100 an hour or more, do you want to spend hours on taxes?"
Running late and wilting under the pressure? "File an extension," Berger advises. "If you wait until the last minute, you'll make a lot of mistakes and you could miss the deadline anyway."
If you owe money, pay up. Or at least pay part of your liability and get on a payment plan for the rest. "Clients worry about owing money they don't have. But it's important to file your return on time, or file an extension at least," Berger says. Putting it off will only result in fines and penalties down the line -- not a prospect that invites much in the way of zen.
If you're going through a divorce, taxes may be the last thing on your mind, so we're here to help. We've got tips for you on which filing status to choose after the divorce, who can claim the exemptions for the kids, and how payments to an ex-spouse are treated for tax purposes.
Filing taxes as a single parent requires coordination between you and your ex-spouse or partner. Usually the custodial parent claims the child as a dependent, but there are exceptions. A single parent is allowed to claim applicable deductions and exemptions for each qualifying child. Even though you claim your child as a dependent, she may still have to file her own tax return if she has income, such as from an after-school job.
The Child Tax Credit can reduce your tax bill by as much as $1,000 per child, if you meet all seven requirements: 1. age, 2. relationship, 3. support, 4. dependent status, 5. citizenship, 6. length of residency and 7. family income. You and/or your child must pass all seven to claim this tax credit.