January Tax Tips
Our team has put together a list of some Tax Tips to better help you! Come back next month for more.
Tip # 1: Separate business and personal expenses
Separating business and personal expenses is not just a good practice; it's crucial for financial clarity, tax compliance, and maintaining a clear record of your business's financial health.
Establishing separate accounts for business and personal expenses is fundamental. This distinction simplifies bookkeeping, ensuring that business transactions are accurately recorded, tracked, and reported separately from personal spending. This segregation is vital for tax purposes, as it helps in accurately claiming business deductions and avoiding potential audits due to the mingling of funds.
Documenting and retaining receipts for business expenses is essential for substantiating deductions and justifying business-related transactions. This documentation becomes crucial during tax filings and audits, validating the legitimacy of claimed expenses.
Adhering to these practices ensures compliance and fosters a professional image. It demonstrates financial responsibility, particularly when dealing with investors, and partners, or during potential audits. Moreover, it provides a clear financial overview, aiding in informed decision-making and accurate financial reporting.
Overall, separating business and personal expenses is a fundamental aspect of effective financial management. It brings clarity to issues in your financial landscape, simplifies tax filings, safeguards against potential audit issues, and supports a more organized and transparent business operation.
Tip # 2: Understand tax deductions and credits
In order to maximize your tax benefits and minimize your overall tax liability, you must comprehend tax credits and deductions.
Tax deductions reduce your taxable income, ultimately lowering the amount of income subject to taxation. Understanding eligibility criteria and keeping accurate records of expenses are crucial for claiming deductions.
Tax credits reduce your actual tax liability dollar for dollar, which results in a direct reduction in the amount of taxes you owe. Because tax credits directly lower the amount of taxes due rather than just lowering taxable income, this feature makes them extremely beneficial. Additionally, if the credit exceeds your actual tax liability, you may still be eligible for a refund because many tax credits are refundable.
Gaining a comprehensive understanding of tax deductions and credits provides you with the knowledge needed to make well-informed financial choices, allowing you to fully leverage available benefits while adhering to tax laws. Consistently evaluating your financial circumstances and consulting with professionals can play a pivotal role in maximizing your tax advantages.
Tip # 3: Keep your records nice and tidy
Having a well-organized record-keeping system isn't just beneficial for day-to-day operations, but it's also essential for a small business to effectively file their taxes. Clean and clear documentation will make it easier to report any income and expenses and validate deductions. Remember, you can’t claim a deduction if you’ve lost the proper documentation.
A receipt scanning system allows you to digitize and categorize receipts effortlessly, so everything is where you need it. This is always beneficial for your business and allows for less paper filing.
IMPORTANT INFO FROM THE IRS:
Period of Limitations that apply to income tax returnsKeep records for 3 years if situations (4), (5), and (6) below do not apply to you.
Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
Keep records indefinitely if you do not file a return.
Keep records indefinitely if you file a fraudulent return.
Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Source Info: https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding