6 Things Your Small Business Can Do Now to Prepare for the 2020 Tax Season
Did some of the changes created by the Tax Cuts and Jobs Act (TCJA) catch you by surprise? Did you learn after you filed your business's tax returns that you missed out on several important deductions? Or have you recently started a new business and realized as you prepared your 2019 tax returns that you were woefully ill prepared? If you answered yes to any of these questions, the time to prepare for next year's tax season is now. Even if your tax filing went smoothly, it pays to start preparing for 2020 sooner rather than later. Why? Because by planning a year in advance, you'll be able to make strategic changes that could greatly benefit your business and also make filing your taxes easier in 2020.
Preparing for 2020 Tax Season: Review Your Records
Before you file away your 2019 tax reports and records, set aside some time to review and analyze them so you can look for ways to improve your cash flow and to optimize your tax savings for 2020. This is also an ideal time to consult with a CPA in order to get their expert opinion on tax reduction strategies for your business.
Preparing for 2020 Tax Season: Get Organized
If you had to frantically search your office for receipts or other pertinent data while completing your 2019 taxes, it's time to get organized. Don't, for instance, just throw all of your receipts into a drawer. Instead, set up a filing system for your receipts, which will allow you to easily locate the ones you need.
You may also want to invest in a scanner, so that you can store your receipts, bank statements and other important information electronically. Yes, the IRS does accept digital images or paper copies of scanned items. Just make sure to give each receipt a logical name so that you can find each one with a quick search. You should also store them in an easily identifiable folder on your computer. For example, if you have a lot of receipts, consider creating electronic folders for each month or for certain categories of expenses. As for your original receipts, it's better to be safe than sorry. So, don't toss them. You never know if you might just need them in the future.
Preparing for 2020 Tax Season: Keep Accurate Records of Your Entertainment
Before the TCJA, businesses were allowed to deduct 50 percent of their meal and entertainment expenses, and in some cases, even 100 percent of those costs. But that has changed. Tax reform has eliminated the deductions for entertainment- or amusement-related expenses for businesses. However, the news isn't all bad. You can still deduct 50 percent of your meals, as long as you were dining with a client or traveling on business.
Another change? Meals that you purchased for your employees used to be 100 percent deductible. Now, they are only 50 percent deductible. But your expenses for a holiday party for your employees are 100 percent deductible.
These new changes make accurate record keeping even more important than before. You will want to write down all of the pertinent information relating to meals in a journal or on a calendar. That information should include the amount spent, the date and location of the meal, the names of the people you entertained (if applicable) and the purpose of the meal. And you will want to be very careful to subtract any entertainment costs that may have been intermingled with your meal expenses. So, for example, if you took a client to a hockey game and dinner and paid for everything on one bill, you are going to have to subtract the cost of the hockey ticket out and have the amount of the meal clearly itemized for your records.
Preparing for 2020 Tax Season: Check to See if You Qualify for Pass-through Status
The TCJA established a new deduction for some -- but not all -- pass-through entities, including partnerships, S corporations, sole proprietorships and limited liability companies. To qualify, a taxpayer with pass-through business income must make less than $315,000, if filing jointly, or less than $157,500 for all others. If you do qualify, you may be entitled to deduct 20 percent of your qualified business income (QBI). It is important to note that this deduction is currently set to end after the 2025 tax year. Owners of certain service businesses, including but not limited to doctors, dentists, athletes and lawyers are not allowed to take the pass-through deduction. If you are an owner of a pass-through business, you may need to consult with a tax professional to determine whether or not you qualify for the QBI deduction.
Preparing for 2020 Tax Season: Separate Your Business Expenses
If your business is still relatively new, you may be using your personal credit card to make ends meet. If so, it's time to apply for a business credit card so you can keep your personal and business expenses separate. Why is this important? Because if you want to claim deductions for business-related expenses, including travel and meals, you will need to be able to provide the IRS with the proper documentation. So, having all of your business-related expenses on one credit card will make it easier for you to validate your expenses in the event you were to be audited.
Preparing for 2020 Tax Season: Consult with a CPA about Potential Deductions and Write-Offs
According to Entrepreneur, most business owners don't understand that "taxes are one of their biggest costs." That is why it's important to take advantage of the many deductions and write-offs available to your business, including some created by the TCJA. For example, businesses can now write-off the full cost of new equipment instead of depreciating the expense over a number of years. A CPA can advise you on the best timing tax-wise for any major business purchases your company may need to make in the coming years.