Maintaining accurate records is essential to running an efficient company and qualifying for tax deductions. By keeping personal finances separate from business finances, you could save yourself some cash.
Before filing your tax return, it is recommended to have a financial professional review the forms. They can ensure they are correct as well as suggest deductions that can lower your taxable income.
1. Establish a Business Financial Account
Maintaining accurate records for new small business startups is of utmost importance, as any mistakes could result in costly tax penalties that eat away at cash flow and compromise cash reserves.
Step one in maintaining accurate business records is opening a financial account specifically dedicated to your business. A separate checking account provides the easiest method of keeping transactions separate between personal and professional finances; some small businesses also utilize savings accounts or credit cards.
An EIN (Employer Identification Number), the equivalent of social security for businesses, will help deter identity theft and fraud. You must submit documents proving who you are and that the business is legitimate before applying for one. In addition, legal structures such as a corporation or LLC will need to be put in place and an accountant can help assist in these areas as well.
2. Keep Expense Receipts
When purchasing something for your business, whether it is a $10 sandwich or an office chair, always save the receipt to prove its expense during tax time. This will help establish its cost to the government.
The IRS mandates that you file or digitize receipts as proof of expenses when filing tax returns. You can either organize paper receipts into folders and label them by month or category, or use an app which scans and stores digital receipts that can then be fed automatically into accounting software.
Reconcile your bank account monthly to prevent expenses or income slipping through the cracks and incurring late payment fees, saving your startup from incurring extra costs from late payments and incurring unnecessary late fees. A regular review usually only takes 30 minutes per month but could save your startup from an IRS audit later down the line.
3. Prepare Invoices Regularly
Maintaining accurate invoices is an integral component of effectively running your business finances, improving communication with clients while increasing the chance that payments will arrive on time.
An invoice must contain both the total billed amount and any applicable taxes; as well as provide payment due dates and include options for online payments from customers.
Maintaining accurate records for your startup will make filing taxes simpler and help ensure you meet all tax obligations. Ecwid allows you to automatically generate and attach tax invoices when orders are placed, paid for or shipped; simply enable this feature from Settings – Invoices & Taxes.
4. Pay Your Bills Regularly
Maintaining accurate financial records will enable you to pay your bills on time. Spreadsheets or software tools are great ways to monitor expenses and payments – this ensures vendors that require payments within specific time frames receive their money in an expedient manner.
Set aside enough money for taxes – and do this regularly throughout the year by making estimated payments to cover your yearly liability and then deduct them on your tax return.
Many small business owners fail to take full advantage of tax deductions that could help lower what they owe the IRS, so education and professional financial advice will help prevent costly errors. It is also crucial that all expenses and income are recorded correctly to prevent late fees or penalties being assessed against your account.
5. Keep Records for at Least Three Years
As a startup business, keeping accurate financial records is vitally important. Accurate records allow you to prepare a budget and file taxes accurately; without them, valuable deductions and credits could slip by unnoticed.
The IRS suggests you keep your records for at least three years; however, if there’s any chance they might come in handy in an audit or tax credit claim later on it would be prudent to retain them longer.
To keep your filing cabinet from becoming overloaded with papers, consider digitizing documents and storing them digitally on your computer. That way, they are easily accessible when needed while saving space and keeping files organized. Furthermore, using a secure cloud storage service could even offer extra peace of mind for records storage purposes.