Tax season doesn't have to be daunting time
A new year begins, and one ends. The familiar sound of file cabinet drawers slamming, papers rustling, flapping folders and computer keystrokes can mean only one thing: time to file the annual tax returns.
The annual ritual of reporting income and expenses to the federal government does not need to be a daunting task. Here are a few tips that may reduce stress and, if employed monthly for 2010, can make next year’s process a breeze.
The first thing is to understand what an allowable expense is. The Internal Revenue Service allows a business to deduct costs (expenses) generated as a result of doing business. Some of the more notable costs are easy to identify: utilities, telephone, advertising, rent, wages, payroll taxes, supplies, professional service and inventory.
However, the total payment made on a loan is not considered an allowable cost. Loan payments consist of a principal and an interest amount. The principal amount is applied to reduce the loan amount, and it is not considered an expense. The interest amount is the fee paid for the loan and is considered an allowable expense.
Although by Jan. 31 one should receive notification of the amount of interest paid for the year, it is sometimes not reported as a business expense. To eliminate this omission, a business owner should have a schedule listing all loans with principal and interest amounts, term and interest rate. The schedule can be used as a checklist to ensure all interest amounts are given to the accountant (tax preparer).
Another cost to businesses that is overlooked at times is the use of a personal vehicle for business use. The IRS standard mileage rate can be used to determine allowable business expense when accurate records of miles driven during the year are maintained.
Before taking business documents to an accountant for tax preparation, one should organize the documents. Organizing consists of separating the receipts by expense category, taking each category of receipts and adding the amounts using a spreadsheet program or calculator with tape. For income determination, sales receipts should be added as well.
It is not wise for business owners to attempt to prepare their own tax return. One should allow an experienced tax preparer to perform this task since tax laws change and the day to day task of running a business is time-consuming.
The tip: Don’t wait until the end of the year to organize records. Set aside two hours at least weekly to organize and record income and expense amounts. Not only will it eliminate stress during this time, but it may also reduce the cost of preparing the tax return.