Getting Ready for Tax Time

For most small business owners, filing out taxes may not be their favorite way to pass the time. But with the right approach and a good accounting application, this process does not have to be a painful experience. As your business matures, you will probably find it easier to prepare for tax season, but if it is your first year in business you may require a few suggestions as to where to start.

Here are some things to take into account when preparing your finances, with end-of-year taxes in mind:

Accounting periods

Most small businesses, unless they have a particular business reason for doing so, report their income and expenses for the calendar year (January 1st to December 31st). Those who would like to use a different fiscal year should fill out Form 8716 with the IRS to ask permission to do so.

Cash or accrual?

Firms can either use a cash or accrual accounting method to keep track of their finances within their accounting application. With the cash system, income and expenses are tabulated as they are actually received or paid. With the accrual process, income and expenses are counted as they are incurred - and receipt or payment may happen at a later date. You can generally use whichever method you'd like - however, businesses that maintain inventory typically use the accrual method.

With the accrual method, you may be able to use your accounting application to more easily comprehend the larger picture of your business' income and expenses. Meanwhile, the cash method shows you exactly that - how much cash you have.


Keeping detailed and accurate records of all of your firm's expenses with your accounting application is crucial to make sure you benefit from all relevant tax deductions.

Start-up costs. Many of the costs you incurred while starting up your new business are able to be deducted - these include advertising, travel, rent, utilities, supplies and more. As these costs are considered capital expenses, the deductions have to be spread out over a period of years.

Meals and entertainment. You can deduct 50 percent of the total expense of a business meal with a client or contact, as well as a business entertainment event which follows on from a meeting. Keep track of the purpose of each of these expenses and make sure you hold on to the receipts to be filed with your taxes.

Vehicles. You can deduct the cost of all driving related to your business, except for commuting costs. There are two ways to monitor these expenses. You can maintain your own records of spending on gas, repairs, maintenance, insurance, etc to determine your yearly deduction. Or, you can opt to use the standard mileage rate and simply keep track of how many miles have been driven for business purposes.

Supplies, office expenses and equipment rental. There are a number of other regular expenses that you are able to claims as deductions, ranging from utilities to staples. You can investigate all of your options by reading IRS tax documentation or by consulting an accountant.

Capital or current expenses?

There are two types of expenses that you are able to deduct - capital and current. Current expenses refer to the everyday necessities of your business, such as rent, gas and paper. These can all be deducted in the same year they are incurred.

In contrast, capital expenses must be deducted over a period of three, five or seven years as specified by IRS rules. Capital expenses include purchases that will benefit you over the long term, such as equipment or land, and are considered to be assets under the tax code.

There is a special rule called the Section 179 deduction that allows small firms to "expense" the full amount they have spent on some assets in the year they were bought up to a certain amount. An accountant can provide more information on this rule.

The home office deduction

Do you maintain your business office at home? If so, you may be able to deduct a proportion of your home utilities, rent, insurance, real estate taxes, mortgage interest and more. Even renters can claim this deduction if they meet the IRS' standards.

One requirement is that you use part of your home regularly and exclusively to run your company. In addition, you have to show that this part of your home is your principal place of business. This may involve meeting clients or customers or storing inventory - even if you do some of your work outside the home.

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