It’s no secret: 2008 was a tough year for business. Adding to the now arduous task of surviving is the dreaded arrival of tax season. Hopefully you’ve been organized and thorough in your recording keeping. If not, you might be paying the price, literally.
“Small business owners and entrepreneurs really get focused on products and services, and don’t spend a lot of time understanding the accounting and book keeping services and how it can save them money,” says Steve Bloom, chairman emeritus of the Counselors to America’s Small Business’ Atlanta branch of SCORE. Audits on small businesses increased 41% in 2007 compared with 2005, according a study by the Transactional Records Access Clearinghouse, a Syracuse University-based research organization.
Here are a few tips to ease your tax headache and prepare you for next year.
KEEP EXCELLENT RECORDS: While there are plenty of free and costly computer programs to help business owners keep track of records, at the heart of the matter is personal bookkeeping. Let’s face it: Computers only record what we input. Keeping detailed records and notes of purchases and expenses is what will save you from an audit or clear you if you are audited. “Sometimes people think they can just buy a software package and it does it all for you,” says Abe Schneier, senior technical manager at the American Institute of Certified Public Accountants. “Even if you use a good software package, you have to be set up properly, and that’s where an accountant is very valuable,” he adds.
For a directory of accountants, check out the National Association of Black Accountants.
Remember, you are responsible for the information your accountant receives. Bookkeeper-for-you.com offers free online bookkeeping.
Google Docs also offers free spreadsheets online which are beneficial if you don’t have one on your computer or if several people need to log information.
CARRYBACK YOUR LOSSES: Experiencing a loss in profit can hurt any business, but there’s hope. Entrepreneurs can recoup some of their losses by executing a net operating loss (NOL). Before 2008, business owners could carryback their losses two years. But the passage of President Barack Obama’s stimulus plan last week allows businesses to offset their losses going back five years.
Here’s how it works: Say your profit declined by $10,000 in 2008 but you had $5,000 in net income the previous two years. Your accountant can amend your 2007 return to offset the entire earnings for that year. You would still show a loss of $5,000 that you can carryback to 2006 and offset your profit for that year. You would be due a refund on any federal taxes you paid on that profit.
“You can go back to previous years until you equalize out,” says Schneier. “[Carrying back your losses] is also a way to get cash flow into the business.”
SPEED UP YOUR WRITE OFFS: Typically business owners write off a laundry list of