With an already long to-do list, tax preparation for your small business is likely the last chore on your mind this holiday season. However, starting early to prepare your financials can benefit you in the long run.
Analyzing your financial position now still gives you time to make last-minute decisions that can help reduce your taxable income and save your business money. This year’s information will also give you the knowledge you need to move toward specific goals starting Jan. 1. Now is the time to finalize financial reports, make important decisions regarding your final expenditures and prepare for the upcoming year.
To keep from feeling overwhelmed on top of the holiday busy-ness, you may wish to break it up into some manageable chunks. This could actually take some pressure off of you, knowing that you at least are getting started.
Finalize 2019 Financial Statements
Having updated financial statements will save your CPA time, which will save you money, when it’s time to submit your 2019 tax documents for review next year.
Start by reviewing your financial records from the year to ensure that the information on your quarterly and annual reports is accurate. For a refresher on the four main reports and their purpose, read “Beginners’ Guide to Financial Statement” on the Securities and Exchange (SEC) website.
You can prepare these documents by taking advantage of financial software to enter all relevant data from the previous year. With a year having passed since the last go-around, even “simple” software can be a bit daunting for some. Set aside ample, unrushed time to gather your records and work through this process (another reason not to put this off). Pay close attention to the time period of each statement and report your financial position either over a period of time or on a specific date. These financial statements will assist you in making informed decisions regarding the future of your business.
If your New Year’s resolution is to enhance your financial record keeping knowledge, University Extended Studies is offering a two-day “QuickBooks for Small Business” class in March 2020 for an early registration price of $345 (through Feb. 18, 2020; $395 thereafter).
Use Asset Acquisition to Your Advantage
If you are looking to reduce your taxable income this season, you may be able to do so by purchasing equipment, machinery or other fixed assets that you will need to expand your business in the future. Under current tax law, you can choose to fully depreciate the purchased asset in the year you buy it. The IRS mandates, “If a taxpayer claims 100% bonus depreciation, the greatest allowable depreciation deduction is: $18,000 in year one. . .” Choosing this method will effectively decrease your net income and, therefore, lessen your total tax bill. Reducing your taxable income is most effective when your business has experienced an exceptionally profitable year—just keep in mind that deductions cannot decrease your income below $0.
Create Your 2020 Projections
Remember that you’re both wrapping up 2019 while setting the stage for a successful 2020 at this time. Accurately tracking your financial expectations is just as crucial to the success of your business as recording your transactions. To prepare your projections:
- Use previous financial data to identify monthly goals for cost reduction and revenue growth for the upcoming year.
- Make a detailed list of all expected income sources and expenses with their corresponding amounts based on your determined goals.
- Present your predictions for each month in one document and subtract total expenditures from total revenue to highlight expected monthly income.
Keep these projections handy as a “quick reference” to guide your projections during the coming year to keep your spending on track. It is also beneficial to compare your budget with your actual numbers over time to assess the financial health of your business.
And, if you find yourself scrambling (again!) to gather this year’s tax and financial documents at year-end, be sure to set up or improve your systems to regularly retain next year’s documents now, as part of this year-end preparation process.
Katie Muzzin is a fourth-year undergraduate student at the University of Nevada, Reno who will be graduating in May 2020 with a Bachelor of Science in Business Administration with majors in both finance and economics.