Tax Preparation Tips: How to Get Your Taxes Done Right

by | Jun 9, 2022 | News

Whether you’ve already filed your taxes by this year’s deadline, OR are still working on your extension – for so many business owners in the US, tax season is frustrating!

Does it have to be? Of course not! IF you do things right and hire the right talent.

Let’s dive into ways to ensure your next tax season is as stress-free as possible.

Have your bookkeeping and accounting done right the first time around

Perhaps you have a bookkeeper and / or an accountant on staff, or you use the services of an accounting firm. Perhaps YOU are your company’s bookkeeper! Whatever the case may be, it’s crucial you understand the importance of keeping your books correct, current, and in order in accordance with Generally Accepted Accounting Principles (aka GAAP).

Why?

Numbers from your accounting are used to prepare and file your business income tax return. Numbers on your business income tax return are used to prepare and file your individual income tax return. If your accounting is incorrect, ALL of your returns are also incorrect. You are also opening yourself up for an audit, possible penalties and interest on unpaid taxes, the need to potentially amend your past returns, in addition to simply not knowing the financial health of your business. If your numbers are off by too much, you may also be facing federal charges! None of this is good!

It’s very important to make sure whoever is doing your bookkeeping and accounting, know what they are doing! In this case, what you pay is what you get, and there’s nothing worse than hiring a cheap bookkeeper and later finding out that your books need to be cleaned up by someone else for the entire year (which is an additional cost we see all the time!).

In addition, don’t wait until the last moment to tackle your accounting! This is not only a terrible business practice (you should have access to correct financial numbers all year long!) but also very stressful as you’re forced to race against looming deadlines.

In a nutshell – make sure you hire a qualified, trained, and experienced bookkeeper / accountant, and keep your books current and reconciled throughout the year.

Know your tax filing deadline(s)

There are various deadlines when it comes to filing income tax returns, depending on the type of return being filed. Traditionally, the deadline are:

  • March 15th for s-corporation and partnership income tax returns
  • April 15th for individuals and C-Corporations

These deadlines may change as a result of holidays or emergencies, as was the case during years 1 and 2 of the pandemic.

If for any reason, you cannot file your tax returns in time, you may request an extension. This gives you an additional 6 months to file.

However, it’s important to note that an extension to file is not an extension to pay taxes. If you owe for any given year, you still have to pay by the original deadline – even if you filed an extension.

Knowing your filing deadlines and preparing ahead of time will save you a lot of stress and headache!

Know which tax forms you will need to file

In addition to having a grasp on deadlines, it’s important to know the names of the forms you will be filing in a given tax year.

Individual taxpayers usually file Form 1040.

If you own a Corporation (C-Corp), you will be filing Form 1120.

If your business is taxed as an S-Corporation (S-Corp), you will be filing Form 1120-S.

If your business is taxed as a partnership, you will be filing Form 1065.

There are many other forms – e.g. for trusts, nonprofits, payroll returns, various schedules, etc. You should familiarize yourself with each form, its filing deadline, and any schedules that need to be filed alongside the main form.

Know whether to expect a tax refund – or a tax bill

There’s nothing worse than an email from your CPA informing you that you owe money to the IRS or state. This is, however, completely avoidable as long as you are prepared.

Investigate whether you are paying enough in quarterly estimated tax payments, in addition to seeing whether your withholdings are sufficient, is very important. It will also be helpful to know your adjusted gross income.

A CPA can help you with all the above endeavors.

Read up on tax deductions and tax credits

Most of us have heard of Child Tax Credits or even ERTC (employee retention tax credits). Most of us also know, more or less, what does and does not constitute legitimate business expenses. But what about all the little details, rules, and exceptions?

Let’s say you need a car. Do you know there are special depreciation rules for large vehicles? Perhaps that extra tax write off will be a deciding factor in your car purchase.

There are many types of other credits and deductions – such as Investment Tax Credits and Lifetime Learning Credits, or deductions such as home office, mortgage interest, and certain medical expenses.

It’s a good idea to read up on the opportunities available to you, or, even better, to hire a professional to analyze which credits and deductions you qualify for so you can cut your tax bill… Which brings us to the next topic.

Do tax planning for yourself and for your business

A tax plan, or tax reduction plan, is an analysis of your business and personal finances undertaken in order to see whether you can reduce your income tax liability (i.e. your tax bill). Not all tax professionals specialize in this type of analysis, so please choose wisely!

Typically, a certified public accountant (CPA) will analyze your accounting, past returns, current business need, personal needs, predicted tax liability to come up with various tax reduction strategies and tax saving projections.

These strategies can concern deductions, tax credits, legal entity optimization, implementing insurance structures or retirement structures, helping negate capital gains tax, etc.

If your tax liability is high, you can save quite a lot. Tax planning is a service with a ROI and you should not hesitate to invest.

Know that filing by yourself is (usually) a bad idea

We understand – some people want to save money by preparing their income tax returns using free or inexpensive tax software. Some people need to DIY everything – and hesitate to hand their tax returns over to a professional tax preparer. Some people simply cannot afford a paid preparer such as a CPA.

While you may conceivably take the DIY route for simple individual returns, business owners should never self-file. There is just too much on the line! Tax laws and tax forms are forever changing, there is just no way to keep up with all of it unless you are a seasoned tax professional or have years of experience with tax preparation.

In addition, self-filing will often lead to business owners overpaying on taxes, as it is very difficult to have a thorough grasp on deductions, credits, or all the types of business expenses they business owners are able to deduct.

If the IRS catches a mistake on your return, you may be subject to penalties and interest, in addition to the costs of amending your tax returns.

Find a reputable tax preparer

We recommend looking for a good tax professional to prepare your income tax returns before tax season, as “tax time” is very hectic for everyone.

A tax preparer must have a PTIN, will usually have a valid license, and should have experience in income tax prep. They would be familiar with both IRS rules but also with your particular business industry. Here the same rule applies: what you pay for is what you get.

Once you find a reliable tax pro, hang on them! They are harder to find than it seems!

Share your tax documents with your tax preparer as soon as you can – do not wait until the last moment

There’s nothing worse than a client waiting until Tax Day to send over their documents. There’s no way for tax professionals to go over all of your documents the day of, prepare and file your return.

It’s best to either send documents over as early as possible – say in March – or request your tax preparer to file an extension. If an extension is filed, a good preparer will give you an estimate of any taxes you owe the IRS or states, so you can make a payment on time and avoid interest and penalties.

Make sure you are using a secure method for sharing sensitive documents

Never send your sensitive information over email without some sort of password protection in place. Most CPA firms nowadays have upload and download portals.

Before sending documents to a new CPA firm, ask them what kind of steps they have taken to make the document exchange process secure. Answers will vary from bank-level security to password protection of PDF files.

Know which state or states you will need to file in

Many of our clients live in one state but have sources of income or investments in other states – such as 1099 income or income from rental real estate.

It is very important to have a grasp of tax law and to know whether you owe income taxes in these other states, or if filing for only your home state is enough.

If you move within a tax year, say from California to Illinois, you will file both a partial California return and a partial Illinois return, consistent with the months you were a resident of California or a resident of Illinois. If you move from Illinois to Nevada, you will file only a partial Illinois income tax return, as Nevada does not have state taxes.

Understand types of income sources

It’s important to know where your taxable income is coming from and to see whether any taxes have already been withheld.

Employment income – this is income from performing various tasks for an employer, such as teaching, treating patients, baking a cake, or grooming other people’s pets. It is usually reported on form W-2.

Self-employment income – self-employed individuals or contractors have no employer and will receive self-employment income, usually reported on a 1099.

Partner dividends / income – if you own interest in a partnership, you might be receiving owner distributions. These are reported on form K-1.

Business income – this is revenue you receive from business activity, such as from a single or multi-member LLC, a partnership, an S-Corp, or a C-Corp. Your business can also be unincorporated (sole proprietorship).

Passive income / dividend income – income from sources such as investments, including income from rental real estate. Your role is limited to a purchase of an ownership interest in a business or purchasing a rental apartment. This type of income is treated differently that active income from sources like running a business, teaching, preparing tax returns, winning lawsuits, etc.

Capital gains – this is income you receive from selling certain items for a profit. These items can include real estate, stocks, bonds, digital currency, and other types of investments.

Retirement income – these are distributions from your retirement accounts (IRAs, 401Ks, 403Bs, etc.). Here contributions were usually tax deferred – meaning, you did not pay taxes when contributing into the account but will be paying taxes upon taking a distribution. There may also be mandatory minimums and age requirements for taking out distributions, just as there are typically contribution limits.

Rental income – profits from renting or managing real estate.

Inspect your return and don’t be afraid to ask questions

When it comes to your tax returns, there is no such thing as a “stupid question”. Your tax return is an extremely important form that you are liable for – inspect both state and federal tax returns for mistakes and omissions, and always call your tax preparer if you have doubts or questions.