Your Small Business Accounting Guide
Tax Day is approaching. For small business owners, this day can be stressful if you haven’t prepared. If you’re just now reviewing your taxes and wondering what you need (or what something means), we can help.
This guide will help small business owners (and tax accountants) tackle this year’s Tax Day and to better prepare for next year. We’ve broken it down into five chapters:
- Business cash flow management
- Essential tax tips
- Tax forms broken down
- Filing taxes as a business owner
- SMB owners share mistakes
Business cash flow management
Scary but true: A lack of cash flow is one of the leading causes of small business failure. Fortunately, there are strategies you can use to ensure that you always have funds in your account to pay expenses and keep your business moving, like reducing your expenses or increasing revenues.
But before you can confidently plant your flag at the top of Mount Cash Flow, make sure you hone up on the subject. Whether you consider yourself financially savvy or not, there are some things you need to know about cash flow in order to succeed.
What is cash flow?
If you hear that term – “cash flow” – being thrown around a lot, but aren’t really sure what it refers to, read on. A business has cash moving in and out of its accounts: in through sales and out through expenses. In the ideal situation, you have more cash coming in than leaving your business. That means you have positive cash flow.
Now, cash flow is different than profit. After you’ve paid your taxes, your vendors and any other bills that your business accumulates, that money left over is profit. Technically, you could pocket all of that as your disbursement as the business owner.
But what happens when those bills come due again and your clients haven’t paid you? Or you have an unforeseen expense, like needing to replace your computer?
That’s where having cash flow comes in handy. You never want your bank account to be at zero because there will always be more expenses, and you need to be prepared for those. It’s frustrating for businesses that run lean because often the profit is a business owner’s salary. Still, it’s important to keep money in your account if you want your business to grow.
Ready to become a cash flow master? Keep these three things in mind.
1. Your cash flow cycle affects your ability to pay bills.
Every business has a different cash flow cycle. This refers to how long it takes from the moment you receive an order to deliver goods and receive payment. For example, if you make homemade items, you need time for the following:
- Ordering materials
- Sewing the product
- Packing the product
- Shipping it
- Receiving funds from credit card transactions
How long your cash flow cycle is will drastically affect your cash flow. If your money is tied up in inventory, you can’t use it to pay vendors. Some businesses have tremendously long cash flow cycles, and they have to do some pretty strategic planning to ensure they can keep the lights on while they’re waiting for their investment in the actual production of a product to be returned.
You can improve your cash flow cycle a few different ways:
- Buy smaller batches of inventory (you may pay more per item, but you’ll tie up less cash)
- Hire staff to help you make products during busy seasons
- Require payment for an order up front
2. The higher your profit margin, the better your cash flow.
If you haven’t stopped to look at your pricing lately, now is a good time. If you’re charging too little, you’re having to work extra hard to keep cash flowing. On the other hand, if your profit margins are higher, you’ve got more cash to work with (and that makes that cash flow cycle easier to deal with since you should have money in the coffers). Here are tips on pricing:
- Look at what your competitors are charging, and price accordingly
- Offer extra value to justify a higher price
- Increase pricing just for new customers to keep old ones happy
3. Certain investments can net more revenue.
It seems counterintuitive to say that spending more on your business could help you make more, but it’s true. If you’re spending five hours a week managing your own accounting (or marketing, etc.), that’s time that you could be spending on your brand’s growth strategy. Hiring an accountant, marketer or even assistant can free up your time, so you can find ways to improve your cash flow.
Remember: An investment in your business is one that will secure its future. It’s scary when you start spending more money on it, but in the long run, it will always pay off.
You have options to boost cash flow.
Income isn’t necessarily your only option to keep cash moving in and out of your business. You can also consider small business financing options like a working capital loan so that you have money in your account when you need it.
Having positive cash flow takes a little advanced planning to ensure you’re never in a tough spot and unable to pay your bills. But keeping these four things in the front of your mind, you should be able to successfully ensure that your bank account always has available funds.
Essential tax tips
Your business might only file taxes once a year, but you should make tax planning a year-round effort. Although you feel the effect of taxes on Tax Day, your tax bill is the result of choices you made during the entire tax year. Here are six important tax tips that every small business owner should be aware of:
1. Make estimated payments correctly.
If you need to file quarterly, the IRS expects you to make a sincere effort to estimate your payments. For instance, you might base your payments on the previous year’s total liability or on the current year’s estimated liability. You can choose to use the smaller amount of 90 percent of this year’s expected liability or 100 percent of last year. If you’re under by more than $1,000, you may have to pay a penalty. If your company’s income is modest, the penalty may not be that large, but it’s certainly an avoidable one.
2. Plan to have funds to pay.
If you’re a little off on your estimated taxes, you might not suffer that much. If you don’t have the funds to pay the difference on Tax Day, you should always file your taxes anyway and then communicate with the IRS. However, you’re likely to get slapped with penalties and interest if you pay late or create a payment plan. Some accountants suggest creating a separate account that is used solely to save money for taxes.
You might also consider small business loans that give you the funds that you need to take care of your tax debt and other expenses. The interest that you pay to service your loans is typically deductible, so this option may be cheaper than having to suffer from penalties for late payments to the IRS. Some accountants believe that paying and filing on time may also reduce the risk of audits.
3. Consult with a tax professional early.
Tax professionals can do more for you than just make sure that you’ve filled out all your tax forms correctly. They can also give you advice about certain deductions and credits that might lower your liability. The impact of these tax deductions could cause you to make different business decisions than you would have otherwise.
For instance, you might decide to buy new computers in December instead of waiting until February like you planned. You can use the expense as a deduction for the next year. Under Section 179, some property can entirely be written off for the tax year it was purchased in. These kinds of deductions really help if you didn’t pay enough estimated taxes. If you’re worried about finding funding for purchases, you can apply for a line of credit. That way, you can access credit when you need it most.
4. Keep excellent tax records.
You may need receipts for some deductions and not need them for other ones. For example, you might just need a log to keep track of vehicle mileage. However, you certainly need to keep records of your expenses to explain them if you get audited.
How do you know which records you should keep and how to keep them? An experienced bookkeeper or tax accountant can help you get organized. Or, another alternative is to use a good accounting software.
Venar Ayar has served small business clients as a tax lawyer for at least 25 years. He mentioned that small businesses don’t always keep the best records, and that can cost them money in the long run. He suggests using quality cloud-based accounting software. Not only is this kind of software convenient, it can also help enforce proper accounting and bookkeeping practices. This kind of software usually integrates easily with other business systems, making proper record keeping almost effortless.
5. Startup costs aren’t the same as post-sale business expenses.
Gail Rosen, a CPA with decades of experience, offered a great tip for startup founders. The IRS treats startup expenses differently than businesses expenses. Startup costs include expenses before making the first sale, but business expenses are those costs incurred after making a sale. You may need to amortize startup costs for a few years and you can’t always take them in the year you paid for them.
Common misconceptions about startup costs generate higher tax bills than many business founders anticipate. Knowing the difference can help you make business plans that increase deductions and reduce taxes.
6. Look at the tax system as incentives.
Tom Wheelwright is a tax expert, published author and CEO. He says that tax laws were never put in place to penalize small business owners; rather, they have been developed to create incentives for companies to act in specific ways. This attitude toward taxes can help startups and small businesses create tax strategies that work with the system and not against it.
Since expenses may be deductible, it’s important to consider different actions with their real cost in mind. Here are a couple of examples:
You might wonder if you should rent office space or utilize a home office. Tom pointed out that a home office might also allow you to deduct move travel and car expenses since you won’t have the nondeductible expense of normal commuting from your house to your office. You might have other reasons to choose to rent an office outside of your home, but if you’re deciding between the two, you should consider the advantages of a home office and whether it will help you save money in the long run.
You could be wondering if you should open a line of credit to help manage your cash flow. Although you will have to pay fees or interest on money that you borrow, you might be able to deduct these expenses from your taxes, so the actual cost to your business might be less than the cost of the loan.
Why consult a tax professional for your business?
Typically, seasoned tax professionals will save your company more than they charge you. If you haven’t already, reach out to a tax professional today to learn more about how they can help your business maximize tax incentives.
Get prepared and stay prepared for Tax Day.
As Tax Day draws near, no business owner ever regrets the preparation they did in advance. Keeping up with estimated payments, setting funds aside to make those payments and maintaining good records is the first step to stress-free taxes.
Tax forms broken down
The IRS’s website is anything but user-friendly, and the time you spend hunting for tax forms is time taken away from running your business.
The secret to finding the forms? Google. We’ll walk you through how to find the specific forms you need (as well as this year’s form, as opposed to the version that came out five years ago), and we’ll introduce you to a few key tax forms that, if you fill out correctly, will keep the IRS off your back.
Where to find the tax forms you need
Sure, you can order physical versions of the key tax documents you need from the IRS – or even schlep it over to the library or post office to find them (well, some of them; the rarer ones will require more of a hunt). But why would you go to all that trouble when you can download them all right from your computer?
Start your mission on the IRS’s Forms, Instructions & Publications page. Here you should be able to find any and every form you require, from the W-9 you need your staff to fill out when you hire them to that 1099-MISC you fill out for contractors.
If you don’t easily find the form you want on the IRS’s site, try Googling the form name followed by the year you need. So, for example, Googling “Form 2553 2019” will get you both the form you need and instructions for filling it out. Even if the form isn’t updated annually, putting the year in will ensure you get the most updated version.
How to know which tax forms you need
While there are seemingly thousands of tax forms (there aren’t), you likely need only a few for your small business. If you’re not sure which you need, ask a professional for help. Here some tax forms you may need to file:
For every business
Form 1040 is the standard form most taxpayers file each year. There are different versions of it, from the 1040EZ for those with simple taxes, to the 1040A for those who might need a few adjustments to their taxes.
If you have adjustments or deductions
There are several Schedules the IRS puts out, and you’ll need these if you have adjustments to income, deductions or non-traditional income. Here are a few that might affect you:
- Schedule C for self-employment
- Schedule A for itemized deductions
- Schedule EIC for documenting eligibility for Earned Income Credit
If you’ve moved your business
If you’ve relocated since you last filed taxes, fill out Form 8822.
If you want to be taxed as an S Corporation
If your business operates as a corporation or LLC and you want to be taxed as an S Corporation (there are tax benefits in doing so), fill out Form 2553.
If you have employees or contractors
Your new hires should fill out a W-4 as soon as they come on board, and then you’ll file a W-2 at tax time, sending a copy to each employee with their payroll and tax information. These need to be sent out by January 31 to employees.
If you hire contractors or freelancers (those who are not full-time employees with salary and benefits), they need to fill out a W-9 when you start working together, and if you pay them more than $600 in a year, you’ll file a 1099-MISC on the reported expense (sending the contractor a copy as well). These also need to be sent to your contractors by January 31, though you have until the end of February to send the IRS its copies.
If you need more time to file your taxes
Here’s an important form if you can’t get all your tax paperwork filed on time: Form 4868 will let you apply for a tax extension and give you until October to file those taxes.
Be aware, though: This doesn’t exempt you from paying your taxes. You’ll still need to file your estimated tax payment by Tax Day.
Tips for getting your tax forms filed correctly
If you’re using an online tax filing program, you may be able to file these forms out digitally through the program. Otherwise, you will be told which forms you need to print, fill out and then mail to the IRS with a signature.
If you feel your tax situation is complicated and are concerned about filing something incorrectly (and the IRS may penalize you with a fee if you do), hire a tax professional to assist you. They can help you understand which forms are essential and show you how to fill them out so that you can do so in the future.
Filing taxes as a business owner
Taxes can be a complicated matter for anyone, but as a business owner, there’s minimal room for error. The National Small Business Association (NSBA) released a report that determined that 34 percent of small business owners spent more than 40 hours a year dealing with their taxes, and 31 percent stated they spent more than $5,000 doing so.
This is why it is no surprise so many small business owners struggle when it comes to tax time. In fact, most (68 percent) hire an external tax practitioner or accountant to help them with their taxes, according to the same survey.
There are many challenges and benefits to filing your own taxes – primarily saving money on preparation fees. However, at the same time, there are also risks and rewards for hiring a professional to do it for you. Here’s a closer look at both approaches to help you make the right decision for your business.
DIY: the pros and cons of going it alone
As a business owner, you’re faced with the important decision of getting professional help with your taxes or handling them in-house. Size – and the complexity of your finances – is an influential factor. If your company employs just a couple of people or has streamlined transactions, filing your own taxes can be a safe and affordable route. That isn’t always the case, however, and there can be many factors involved when deciding to take the DIY route.
So, how do you know if it’s right for you? Ask yourself these five questions to find out.
1. Are you able to focus?
Your tax preparation requires your complete attention. If your business gets busy or you’re frequently interrupted, DIY may not be the route for you. Due to the complexity of filing, the margin of error is relatively high. It’s easy to make a mistake if you rush through it. Omitting pertinent information can be costly. The fine for these mishaps can be a lot higher than what it would have cost to hire a professional.
2. Do you need customized guidance?
As a business owner, tax questions can arise throughout the year. If you file your own taxes, you won’t have access to a pro that can answer them for you. More often than not, DIY software only answers generic questions.
3. Does your business have unusual transactions
Most DIY software isn’t designed to handle unusual transactions. It may cheat you out of a means of minimizing your tax liability if it doesn’t recognize what you’re trying to do. It’s important that any DIY options be equipped to handle your unique situation.
4. Is it cost-effective?
Time is money. Filing your own taxes will undoubtedly lead to some time constraints when running your business. You need to consider where your time is valued most, and what is the most cost-effective. If your time is more valuable elsewhere, hire someone.
5. Are you up-to-date on changing tax laws?
Tax laws constantly change, and this is likely the main reason small business owners choose to hire a professional. They simply don’t have the time to stay on top of everything. If you’re up for the challenge, there are several resources online with the most up-to-date tax law information.
So, with all these potential considerations, why do some business owners go the DIY route? Consider these potential benefits:
- Saving money is the obvious number one benefit to filing your own business taxes. Professional service fees can get expensive depending on the size of your business and the amount of paperwork you have. It can be enough to persuade you to do-it-yourself.
- When you file your own taxes, you do it on your own time schedule. If you can easily set aside the time needed, self-filing may be the right choice for you.
- As a small business owner, it doesn’t hurt to build your knowledge on how taxes affect your business, your revenue and the laws surrounding them. Filing your own taxes can help you learn more about your own finances and help inform decisions going forward.
- A do-it-yourself option allows you to electronically file your taxes (e-file). This means you can receive your tax return within weeks of filing; it may be significantly faster than going through a professional.
- There are endless resources online to assist you with filing your own taxes, from the change in tax laws and guidance on the necessary forms to tax filing software itself. It’s never been easier to be autonomous, especially if this type of independence is important to you.
Hiring a professional
The IRS typically advises business owners to get professional help with their taxes. Often, it helps ensure that your taxes are filed in a timely, accurate and efficient manner. Many small business owners find hiring an accountant an expensive cost, but depending on how busy you are, and the role you play in your business, it may be the wisest choice.
What do you need to think about if you’re going the professional route? Ask yourself these questions.
1. Are they truly qualified?
You should never simply trust a professional at their word. A professional accountant won’t mind you checking on their qualifications. The IRS has some useful tips on how to choose a tax preparer, and the following are key points to consider:
- All professionals qualified to file taxes are issued a Preparer Tax Identification Number (PTIN).
- Check on their history. Do they have any disciplinary actions? Confirm they are licensed through the state board of accountancy for certified public accountants.
- Do they charge a large service fee? The IRS recommends never allowing a tax preparer to take a percentage of your return. The fees should always be clear up front.
2. Will preparing your materials take too much time?
Despite hiring a professional, you still may spend a large amount of time collecting and organizing documents for them, as well as explaining your business. If needed, look for accountants that also offer some type of bookkeeping services for basic accounting and consolidation of expenses, revenue and other financial factors.
3. Can they accommodate your schedule and tax deadlines
Consider how their timeline and needs will influence your schedule. When the accountant calls for more information, you’ll need to be responsive or risk racking up extra costs or delays. If they call, need a document or something signed, you may find yourself at their beck and call.
Still, despite the need to verify that a professional is qualified and the need to pay their fees, many business owners find it’s well worth the investment. Hiring a professional carries many potential benefits:
- If you experience rapid growth in your business, you may not have the time or knowledge to accommodate that shift in finances before tax season comes. Hiring a professional should alleviate the pressure, so you can enjoy your business success and ensure you’re taking the steps needed to avoid any surprises (such as increasing quarterly tax payments).
- As a business owner, shifting the filing responsibilities to a pro frees up your hands to do what you do best: run your business. Filing your own taxes could prevent you from accomplishing new tasks, increasing sales and clientele and overall management in general. When tax prep takes you away from revenue-generating activities, you’re hurting the bottom line.
- Professionals will have more knowledge than you when it comes to filing your taxes, and they may know ways to save you money that you don’t know. Sometimes the amount you save far exceeds the amount you paid to hire the pro in the first place.
- Tax preparation fees are tax deductible, thereby reducing your income the following year.
- Professionals are always going to stay aware of tax laws, so you don’t have to. Tax laws are incredibly complicated and can take significant time to research.
- Establishing a relationship with your tax preparer allows you year-round access to tax questions that only a professional may be able to answer. A trained professional can even guide you on how to plan ahead for tax season, advising you on when to make new purchases and what your reasonable compensation should be.
Whether you choose to go the DIY route or hire a professional, it’s essential to have a tax strategy for your business. The sooner you get your plan in place, the sooner you’ll be ready to address any issues that arise.
SMB owners share mistakes
Running a small business can come with bumps and bruises, but there’s no reason you can’t heal from them. Kabbage asked small business owners their worst financial mistake and how they rectified it. Hopefully, they’re experiences can provide insight to avoiding financial mishaps in your own small business.
What was your worst financial mistake and how did you rectify it?
“The biggest financial mistake we have ever made is not setting aside emergency funds. There will always be cycles of boom and bust regardless of how good your business is or what industry you’re in; that’s just the nature of that game. We rectified it by offering deep discounts on our shoes to increase sales and liquidated unused and old inventory.” – Rachel Baileys, The Scarpetta
“The biggest mistake I made when starting my business was trying to do everything myself. Looking back, this approach slowed the overall growth of the business. I had to acknowledge I needed help. Only when I started to delegate tasks and assign project managers were we able to scale up.” – Brad Shaw, Dallas Web Design, Inc.
“We made some real financial mistakes with our AdWords spend in our early days as a company. … We didn’t utilize our match types and negative keywords effectively and, as a result, lost a lot of money on that platform through irrelevant clicks. We fixed this by really learning, in depth, how the platform worked. Since then we’ve enjoyed a consistent ROI from Ad words. AdWords can really be a killer if you don’t understand it!” – Tim Grinsdale, TOAD Diaries
“My worst financial mistake was covering a large upfront order for a big client overseas. They took 90 days to pay after agreeing to pay in one week. I probably sent a few hundred emails and threatened legal action before the French company paid.” – David Lowe, Qwerky
“I learned the hard way you have to budget to manage your cash flow and what gets most small businesses in trouble is not proactively managing their cash flow.” – Bryan Clayton, GreenPal
“Biggest mistake was waiting too long to switch a higher-level accountant (versus just a good bookkeeper) who could provide real actionable data and decision making support by learning our business. We felt like moving to a higher cost accountant/controller would be too expensive, but we rectified the situation by realizing that the money we spent on paying for better accounting advice would allow us to better manage cash flow, including lines of credit, such as Kabbage (of which we are a customer.)” – Coby Pachmayr, Idea Spring
“As a small business owner, the biggest financial mistake I’ve made is focusing on growing my company’s total sales and customer base instead on what truly matters, which is the company’s bottom line. I got so caught up in creating content and growing my site’s traffic, that I neglected to spend the necessary time required to optimize some of the other areas of my business such as customer retention and employee staffing, both of which was costing our company a lot of money on a per-customer basis. A huge contributing factor to why I made the mistake I did was because I wanted to do everything myself. I had a ‘do it yourself’ mentality, and this actually slowed the growth of my business. I was finally able to solve some of the internal problems within the company by outsourcing a lot of what I did to other employees and freelancers. That way, I had more time to focus on big picture stuff, that only I, as the owner of the business, could do.” – Peter Yang, ResumeGo
“My worst financial mistake was that I didn’t analyze the financial parameters enough for several first years of my business. I just checked an income and main costs. However, it’s obvious that every owner must list and analyze all KPIs. … The remedy is pretty simple. You just need to write down all the numbers on a daily basis. You can use any specialized software or just make a table in Excel – doesn’t matter, but do this every single day. … First, I recorded everything by myself. It took a long time but was necessary. Then I asked my employees that were in charge for different areas (sales, production, advertising, etc.) to fill in the small shared tables, also on an everyday basis. … And you know what? In several months, the company somehow became profitable. We just saw many small holes by which our money leaked and ‘closed’ them.” – Veniamin Bakalinskiy, iTrex Language Services
“Our worst financial mistake in our history was to hire more employees than we could afford. It sounds like a very basic error, but it is not. … How do we solve it? With absolute sincerity. We met the entire company and explained that there were two options: Either we dismissed part of the team, or eventually the company will be bankrupt, and we were all going to be out of work. … The result? With a lot of effort, everything in the end came out well, and most of the people we fired, then we were able to hire them again months later.” – Cristian Rennella, oMelhorTrato
“The worst financial mistake my cofounder and I made at InvestmentZen is overspending when the company was first founded. … We wanted to grow quickly, so we purchased a lot of various tools and software that we didn’t use and/or didn’t contribute to driving traffic/revenue. That ended up forcing us to put more of our own money into the business to keep it afloat until it started to generate revenue, so we were lucky that we had some savings set aside. Had we not, we would have either had to take a loan, get investors or shut down the operation after spending five figures and 6 months on it, which would not have been fun. Once we had to put our own money in, that was the wakeup call we needed to institute a bit more discipline in the buying process and try to tie every dollar spent into some tangible ROI down the road. We also set up a monthly budget that was super helpful, which had the side effect of making us wait to see the results of an experiment and taking those learnings into account before trying the next growth strategy.” – Han Chang, InvestmentZen
“As a small business owner, you may find yourself doing much of the work yourself, ending up exhausted and ready to throw in the towel. You spread yourself too thin, finishing your work but not creating the best possible outcome. … Of course, you have talent or you would not be an entrepreneur, but focus on your two best talents and hire or find business partners that exceed where you are weakest, and let them handle those areas of the business. … Identify your mistakes. Are you taking on tasks that are not necessarily your strength when you could pass them on to somebody who is better at it? If so, learn to pass the baton to the proper person. Even if that means hiring extra professionals, in the end you will find the investment well worth it.” – Nick Sawinyh, Seomator
As a small business owner, understanding how taxes work helps you efficiently and effectively file your business taxes. As a tax accountant, helping your clients gain a deeper understanding of their tax forms and what they need to prepare helps you prepare their taxes – as well as your own. With the right preparation, you can make taxes easier for yourself and your clients.