Tax season for S corporations and partnerships ended today, March 15. Some LLCs may have another month before they file their tax returns. However, there’s no better time to evaluate how your accounting systems are working for you than during tax season. This is when your accounting system either proves its efficiency or proves how necessary change really is.
Ask the following questions to end your tax season angst.
Are your accounting systems working for you?
An accounting system is more than the software you use to record financial data. It’s the system you have in place to make sure financial data has been captured and is readily available at tax time. It includes the policies you use to manage Accounts Receivable and Accounts Payable—especially if you use accrual accounting in your business. It incorporates the systems you use to share financial data between the departments within your business—sales, inventory, customer support, etc.
- 4 Ways to Expose Poor Accounting Systems
- It should be easy to tell exactly what’s happening across your entire business. Management reports should be error free and up-to-date. You should know exactly how much money you made last week, last month, last quarter and last year. Also, you should have detailed expense reports for the same time frames.
- There should be no need to re-enter and reconcile data between departments. Sales orders, order fulfillment, inventory and any other financial system should be integrated.
- End-of-period reports should not be time consuming to generate.
- Asset records should be accurate, reflecting inventory that’s physically missing or property that’s no longer functional.
Accuracy in accounting is one of your best defenses during an audit. If you don’t have an integrated system, the likelihood of errors increases with each additional financial department. Don’t let fear of the cost and time it will take to upgrade and make improvements be an obstacle to ending your tax season angst. In accounting, the mentality of, “If it isn’t broken, don’t fix it,” can be detrimental. You don’t want to wait until you discover the system is broken. By then, it could cost the business significantly in fines.
Are there any tax changes that will affect my business?
The requirement that partnerships using the calendar year file by March 15 is just one example of a tax change that affected many businesses in 2016. C corporations gained an additional month to file, while S corporation filing dates remained the same.
Some changes are beneficial. For example, the standard mileage rate went up in 2015. It pays to stay current with tax changes.
What are the deductions we could target this year?
“Make the most of your deductions,” as Forbe’s author Drew Hendricks suggests. “…keep in mind that tax rules are not just regulations to be followed; they are also a list of incentives to be used to your advantage.” Hendricks suggests IRS rules for exemptions and deductions “are essentially ways for the government to try and get you and your business to spend money the way the government wants.” Once again, remember: rules change, so working with an accountant who stays current with tax law could reduce the payout the IRS expects from your business.1
Are there any best-practice strategies we should put in place?
One the key areas of angst is the stress paying tax liabilities places upon a company. Review the systems you are using to set aside money for these liabilities. Getting into debt with the state or IRS is almost loan-shark costly.
Creating a separate bank account is one strategy that has worked for many businesses. Send anticipated liabilities—sales taxes, payroll taxes, estimated taxes, etc.— directly into the account. For example, transfer sales taxes as you add up each day’s tills. Deposit payroll taxes for both employee and employer into the account when payroll goes out. When the state and IRS draw payments from the account, the funds are always there. This makes it impossible to ‘accidentally’ use the money for something else.
As you answer these questions, make notes for what you need help with managing as well as what is working for you. Vow to address what needs work over the summer so you reduce next tax season’s stress significantly.