April is fast approaching, which means that it’s tax season for individuals and businesses alike. If you’re a new small business owner, this may be your first year preparing and filing taxes on behalf of your company. Tackling your company’s taxes alone is not uncommon: 46 percent of SMB owners don’t work with an accountant. It is incumbent upon these owners to know the rules, regulations and mistakes to avoid when filing.
There are many tools that small businesses can use to make the job easier, less time-consuming and more cost-effective, even if you’re just handing off well-kept, year-long records to a third-party to file. The first step in filing is to gather all of your records, and suffice to say, that process is less harrowing when you
utilize automated software rather than tracking everything manually, or even in spreadsheets.
Despite the fact that technology has altered the way we conduct most of our lives, from communication to travel to shopping, many small businesses have been slow to adapt to systems that make asset management, inventory management and payroll management (all of which factor heavily into tax filing each year) less of a headache.
If you’re still calculating everything by hand, consider upgrading to these systems to make filing next year easy and more efficient.
Automated Inventory Management
According to H&R Block’s Small Business Tax Preparation Checklist, accounting for income (accumulating gross receipts, sales records, returns and allowances and so on) is the first thing to do. Next up is to calculate the cost of goods sold, if applicable. For that, you’ll need a quality inventory management system.
The cost of goods sold has a major impact on your tax filings. Small businesses need to account for their existing inventory, the beginning and ending inventory dollar amount, items removed for personal reasons and materials and supplies, yet 48 percent of the companies polled in the Wasp State of Small Business Report don’t do this or use a manual process.
Having an automated inventory management system is crucial for two reasons: It will keep records of every inventory transaction you made over the year, and it will help reduce unnecessary stores of inventory. Businesses that don’t have a system to help them forecast their inventory needs properly instead tend to stockpile their wares, overspending on the carrying costs of inventory (such as storage, security and upkeep) as well as creating higher tax bills, since they must account for the inventory on hand at the time of the audit. Inventory management tells small businesses when to “pull” new inventory, keeping costs low.
Fixed Asset Management Software
Purchasing assets falls under expenses when calculating the tax bill, alongside things like advertising, travel expenses, insurance and interest expense. Unlike inventory, fixed assets are purchased by businesses with the intent to be used in the long-term production of income, such as computers, vehicles, printers, barcode scanners and so on. An asset management system plays multiple roles in the task of creating a more manageable tax bill.
Any business larger than one person has dealt with issues of lost, misplaced or even stolen fixed assets. By creating a fixed asset database, you can track which assets were checked out for use, at what time and by whom. When assets go missing, they become ghost assets: Assets that appear on the general ledger but are missing or unusable (perhaps they are broken and have not been fixed, or parts were taken from them to fix other broken units, or they have been fully depreciated, more on that below). Not only do ghost assets interrupt workflow, but since property taxes must be paid on assets like office equipment and machinery, they result in higher than necessary tax bills.
There are legal ramifications to not accurately reporting the status of assets and allowing ghost assets to haunt the ledger: Companies that are found to be overvaluing their assets will be out of compliance with the Sarbanes-Oxley Act, the penalties for which can be as high as million-dollar fines and imprisonment for CEOs that were either mistakenly or willfully ignorant.
Additionally, a quality asset management system will automatically calculate the depreciation of your assets so you can accurately write them off over time. Every asset must be depreciated over the course of its “useful life,” and since depreciation is an expense, it decreases the company’s taxable income for each year of that life. There are certain rules that businesses must follow, according to IRS guidelines. For example, the same method of depreciation (examples include straight line, declining balance and sum of the years digits depreciation) must be used throughout the asset’s time in use, until it can be replaced.
Time Clock Software
Wages paid to employees is another expense on the tax prep checklist. Anyone who works in payroll knows that companies still using a manual process (40 percent of small businesses do so even today) subject their HR department to hours of calculating, fixing and finalizing time cards. Companies that don’t utilize an RFID or biometric system are often plagued with payroll errors that have a major impact on the bottom line.
Whether due to employee miscalculation or time theft, or due to calculation errors (just to name two of the myriad reasons why payroll mistakes happen), the IRS says that 33 percent of employers make payroll errors. Failing to keep accurate payroll records, including timesheets, expense accounts and copies of W-2 forms, readily available for IRS inspection is one of the five major payroll mistakes to avoid, according to the U.S. Small Business Administration.
There are two major tax-related issues related to payroll errors: The IRS can and will issue penalties for inaccurate employment taxes, they did so to the tune of $4.5 billion in 2013 alone. Similarly, employees who feel that they were wrongfully compensated can and will file lawsuits against their company via the Fair Labor Standards Act and collective actions through this law have increased greatly since 2001. In all, even accidentally shorting your employees can come back to haunt you. Having an automated system to backup your claims is the only sure-fire defense against such accusations.
Tax season is famous for being costly, stressful and sometimes legally problematic. This is certainly a symptom of relying on manual processes to record and calculate the numbers that need to be reported to the IRS. Switching to automatic systems for inventory, asset and payroll management can be the first step towards a more cost- and time-efficient end of the fiscal year.
How would using these tips and tools ready your small business to take on the tax challenges of the future?
