How Your Business Accounting Software Can Help You File 2018 Taxes
It’s almost springtime again. Soon, the sun will be out, the birds will be chirping, and taxes will be in the air.
With April 17th fast approaching, accounting software is more important than ever. Why? Whether you’ve realized it yet or not, accounting software can be one of your biggest assets in the struggle to get your taxes done and done well.
Every accounting software is different, but we’re going to teach you how to use the following common features to get the most out of your accounting software this tax season.
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One of the most important things you can do for your taxes (and for your business in general) is to keep detailed records. Especially when it comes to expense tracking, make sure your data is up-to-date and categorized. That will make it easier to quickly determine your profits and losses.
Almost all accounting software programs have expense tracking features, and many even allow you to attach pictures of receipts for your own personal records. Being able to set custom categories for transactions is also a nice plus, especially if you design them to correspond with IRS categories. This will save you time, money, and stress come tax season.
It’s vital to make sure your income/sales information is up to date. You want your cash flow, both negative and positive, to be accurately represented. It’s also important to know whether you run your company using accrual or cash-basis accounting.
- Cash-Basis Accounting: Records income when products/services are paid for (i.e. when you receive payment from a customer on an invoice)
- Accrual Accounting: Records income when products/services are incurred (i.e. when you send the invoice to a customer, even if they haven’t paid yet)
The type of accounting you use will determine which recent transactions count as income for the current year, and which are saved for next year’s taxes.
Separate Personal & Business Expenses
Several software options, like Wave, allow you to separate and categorize expenses as personal or business. Ideally, you’d want to have a separate business account, but if you don’t, this feature is incredibly important.
According to Eric Tyson:
One of the IRS’s biggest concerns is that as a small business owner you’ll try to minimize your company’s profits (and therefore tax) by hiding business income and inflating expenses.
The IRS may also suspect that your reported deductions are personal expenses rather than legitimate business expenses.
The ability to separate personal and business transactions could save you a lot of headaches, and clear records will take the IRS’s radar off your back (or at least provide protection if you are audited).
Most accounting software programs allow you to track mileage deductions. Some even support travel and home office deductions. But while these features can be incredibly helpful, your accounting software probably only scratches the surface of all the deductions you could claim on your taxes.
In almost any blog, book, or article about small business taxes, the biggest mistake small business owners make is not recording enough deductions. Yes, you heard that right. If you are self-employed or own a business, you could seriously be missing out on some savings.
According to the IRS, you can deduct any business expense that is “both ordinary and necessary.” Here are some of the most common, and least known, deductions available for small business owners:
- Meals and entertainment
- Home office
- Car and truck expenses
- Office supplies
- Office furniture
- Rent on machinery or equipment
- Rent on business property
- Computer software and subscriptions
- Insurance premiums
- Start-up costs
Your accounting software can definitely get you started down the right track, but most software is limited to just the basics. Be sure to consult a licensed CPA, read our common business deductions article, or check out the IRS business deductions page for more details and to see if you qualify for these tax breaks.
If your accounting software has an inventory feature, use it! Companies manufacturing products or reselling items will have to value inventory at the beginning and end of each tax year. These records will give you your COGS for the year, a calculation that is needed to complete several tax forms.
A valuable feature of any accounting software system, reports give you a solid way to monitor the financial health of your business. They can also be extremely useful when filing your taxes. So long as your books are up to date, you can pull key information from reports to fill out your taxes easily and efficiently.
Make life simpler for yourself (or your accountant) and have the following reports accessible and ready to go when you fill out your taxes:
- Profit & Loss Statement: This is arguably the most important report come tax time. Profit and loss statements (or income statements) help calculate your net profit for the year (or your net losses, though hopefully that isn’t the case). You will have to use your net profit on multiple tax forms.
- Expense Report: It is important to generate an expense report in addition to a profit and loss statement so that you or your accountant can see each transaction in detail.
- Income Report: The same is true of an income report.
- Balance Statement: A balance statement (or balance sheet) is used to see the assets and liabilities of your company. Assets are often used to determine equipment deductions or depreciation.
- Payroll Summary: If you run payroll, be sure to have a payroll summary report that shows the year’s payroll records.
- Sales Tax Summary: A sales tax summary will come in handy when calculating your sales tax returns.
- Mileage Log: If your software doesn’t have this feature, it isn’t a deal breaker. But if you are able to track deductions, make sure you have this report ready to go.
All decent accounting solutions should provide the above reports (the names of these reports may vary slightly, depending on the software). If yours doesn’t, it might be time to upgrade your accounting software.
If you are ever audited by the IRS, you will need clear records of all your business transactions.
Most accounting programs will let you export reports (usually via .csv or.pdf). It is important to determine which export capabilities your software offers ahead of time. You should also save your business records in a safe location (or multiple locations), as many accounting programs only let you run reports on the current year. Believe me, you don’t want to be trapped in an audit and unable to find a past year’s report.
The tax forms you must file will depend entirely on the type of small business you own. Some of the most common taxes business owners face are income tax, estimated quarterly taxes, and self-employment taxes. Basic tax forms include 1099-MISCs, Schedule Cs, W-4s, W-2s, and 1040s. (To see which forms are required for your business, check out the IRS’s Small Business Tax site.)
Your accounting software should make it easier for you to file these forms. Many companies offer at least some form of tax support. For your convenience, here is a list of support services offered by the most common software providers:
- Xero – 1099-MISCs, W-2s, 940s, 941s, 944s, and Sales Tax Returns
- QuickBooks Online – 1099-MISCs and W-2s
- QuickBooks Pro – 1099-MISCs, 1096s, 940s, 941s, 944s, W-2s, and W-3s
- QuickBooks Self-Employed – Estimated Quarterly Taxes and Schedule C
- FreshBooks – 1099-MISCs
- Sage One – 1099-MISCs and W-9s
- Sage 50c – 1099-MISCs, W-2s, and W-3s
- Zoho Books – 1099-MISCs
- Wave – 940s, 941s, W-2s, and W-3s
Be sure to check with your software company about how their tax support works. Do they do e-filing? Do they automatically fill out the forms electronically? Do you have to pay for the forms? These are all good questions to consider, and answers vary by company. If you are looking for accounting software that has good tax support, check out our article, Survive The Tax Season With These 3 Accounting Software Game Changers.
Learn More About Small Business Taxes
If you are interested in learning more about small business taxes and discovering tips and tricks to make tax time a breeze, a great place to start is your software’s help center or blog. I’ve also compiled a list of some of the other great resources out there.
- IRS: This is your site for all things tax-related — they do make the rules, after all. There is also great information on here for the self-employed.
- IRS Virtual Workshops: The IRS has created nine videos for small business owners. Here is a list of the topics covered:
- What you need to know about federal taxes and your new business
- What you need to know about Schedule C and other small business taxes and tax forms
- How to file and pay your taxes electronically
- What you need to know when you run your business out of your home
- How to set up a retirement plan for yourself and your employees
- What you need to know about federal taxes when hiring employees and contractors
- How to manage payroll so you withhold the correct amount from employees
- How to make tax deposits and file a return to report your payroll taxes
- Hiring people who live in the US but aren’t US citizens
- FreshBooks: FreshBooks has one of the best accounting blogs around; among other things, it contains over 150 articles about taxes. Topics range from a guide to Schedule Cs, to how to prepare taxes faster, to everything you need to know about tax audits.
- First-Time Business Owners: A Brief Guide to Tax Filing: The Entrepreneur put together a helpful tax filing guide for those you are new to business.
- Top 20 Deductions for Small Businesses: This Huffington Post article lists 20 of the most common (and often most overlooked) deductions available to small business owners.
- Small Business Tax Prep Checklist: H&R Block put together a checklist that helps you make sure you are prepared to do your taxes.
- 8 Small Business Tax Preparation Mistakes to Avoid: Give this a read and save yourself some time by doing your taxes right from the beginning.
- Small Business Taxes for Dummies: I’m not calling you a dummy, but whether you’re just starting out or are a seasoned small business professional, this book (by Eric Tyson) is a must-have guide to tax season. One of the best parts of the book is that Tyson takes common tax forms and explains them line by line so that anyone can understand.
Say goodbye to tax worries! We hope that these resources and features help put the spring back in your step.