Every tax preparer in the nation has been visited by some version of the client who views tax season with the kind of horror that is usually reserved for movie actors looking over a corn field and spotting an invasion of predatory insects.
They arrive in person or send us online a version of the proverbial shoebox full of receipts without classifications or labels so we can sort through them for times and patterns and magically determine what they are for.
These clients curse the tax laws as if they had just been invented. They blame the collectors. They are overwhelmed with the stress of the process.
When I talk to them, I am always surprised that they are caught off guard by tax season, as if it arises each year unexpectedly and unwarranted, like a spontaneous and devastating act of nature.
When you take that approach to your personal or business finances, it is unduly and unnecessarily full of angst.
If you recognize yourself or a milder version of yourself in the portrait above, you can do a lot to remove the angst anxiety of the season and in the process keep more money in your pocket.
As we wrap up the personal tax filing deadline of April 30 and approach the self-employed tax filing deadline of June 15, it is a good time to consider that tax season isn’t actually a season at all.
To those who keep the most money in their own hands, it is just one more function in a “season” that extends all year.
As a self-employed person, a small business owner, or an individual, if you keep your affairs in order each week and each month, you will not only remove the burden of tax season but you will be able to keep the most money in your pocket. It is the one way you can be sure to take advantage of every available tax break allowable to your circumstance.
At Piligrim Accounting Inc. we provide income tax return preparation services to small businesses and individuals. In the process, we have been able to help many clients claim rebates that they didn’t even know they were entitled to. Because they had the proper paperwork, we could analyze their unique situation and look for ways to help them.
Besides these obvious gains, there is a second advantage to keeping your financial matters organized.
For small businesses especially, if you keep your books up to date either outsourced to bookkeeping services like ours or with your in-house bookkeeper, you can also estimate accurately your tax liability in advance and incorporate it into your budget, as opposed to being caught off guard with huge taxes that you cannot pay.
What financial data should you be keeping?
Save detailed records of any invoices, bank statements and receipts you receive. If the receipt pertains to travel or some promotional expense in your business, be sure to take a minute to include a small notation of who was present or entertained and the business goal it related to.
I encourage people to write on the back of their receipts what it is for. The memories of busy people are full, and going back over a year’s receipts can leave blanks that could be solved with a simple notation at the time.
On a day to day basis, small businesses or self-employed people should be able to access an up-to-date statement of your accounts receivable and your accounts payable.
Remember that the bottom line is that if you have a document that reflects on every claimable expense and every bit of income earned, you can’t go wrong. If you face an audit, you will be able to handle it. Keep all of these records for at least seven years.
You should also have an income statement and a balance sheet when tax time arrives. On the balance sheet would be all your assets including inventory and equipment, and your liabilities (accounts payable and loans etc.)
Make sure that you regularly reconcile what’s in your bank account and what’s in your accounting statements. You would be surprised how long some people go before they do this and yet it is so important to your business.
If your books and bank statements are reconciled, you can ask your bookkeeper or accountant to predict how much tax you will likely to pay. You can have estimates and can budget accordingly and you may even be able to find ways to reduce your tax bill.
The biggest reason small business people fall behind in their taxes is because they didn’t budget for them, they had no idea how much was coming, and then suddenly they have thousands of dollars to pay and they just don’t have the money.
All the gains they made one year can be wiped out because of this lack of planning, and they start the New Year in the red. Then they start a cycle of just not being able to catch up.
After your accountant has completed the tax season, book some time to ask them what you are not doing now that could ease your tax bill later. You need to get started on that process of change right now, not wait until next tax season deadline and contemplate it again.
When federal and provincial tax laws change, consult your accountant again, regardless of what month or season it is, and ask how this new change will impact you and if there is something you should be doing immediately.
Certified professional bookkeeper and certified tax specialist Elena Ivanova is managing director of Piligrim Accounting Inc., a national accounting and tax preparation service based in Richmond Hill, Ontario. You can reach her at email@example.com.