For many small business owners, tax season represents a time of confusion and frustration. It involves combing through piles of receipts and paid invoices, trying to figure out what counts as income and what can be deducted.
However, it doesn’t have to be this way. You can start sorting through your financials now—before 2020 even ends—to make your tax filing easier in the spring.
Check out a few of these top tips to maximize your savings and streamline the process.
Consider Deferring Income
December 31 is the cutoff for receiving income for the current year. If your clients pay you before this year ends, you’ll have to count the income in your current tax filings.
However, if you defer the income—by sending an invoice on January 1 of next year, for example, therefore delaying payment—you won’t have to worry about paying taxes on earnings until the following year.
While this strategy simply delays tax payments for a year, it can still help you if you’re on the fringe of a tax bracket. Consider talking with an accountant to see if this strategy will benefit you.
Spend on Investments to Maximize Deductions
In the same way that your income cuts off on December 31, so does your window to buy items that could be deductible. Look for investments that can help you to deduct from your reported income, including marketing expenses, equipment investments, and educational costs (like attending a conference).
Some vendors offer discounts if you pay for a year’s subscription or fees at once (like software services or marketing retainers)—so you could actually save money in the long run by paying for these expenses in full now. Charging these items to your business before the year ends can allow you to deduct them on your 2020 taxes.
Donate to Local Nonprofit Organizations
If you’re looking for deductibles to add to your books, consider donating to a charitable organization in your area. You can match donations to a nonprofit during Giving Tuesday or set up a fundraising event to grow the amount you donate with the support of the community.
Nearly a third of annual giving happens in December, making it by far the biggest month for charitable donations. Your local nonprofits need you, and this is a way to support them while also helping your bottom line.
Contribute to Your Retirement Plan
If you operate a pass-through entity like a sole proprietorship or an LLC, make sure you’ve taken care of your retirement account this year. The maximum contribution to an IRA is $6,000, and the deadline to contribute to the tax year is April 15.
Not only can you report retirement investments on your taxes—you can also start growing your money now to set yourself up for the future. Considering only 10% of Americans are confident they’ll have enough saved to get through retirement, you can help yourself out by saving today.
Start Gathering Your Receipts and Documents Now
While taxes don’t need to be filed until April 15, there’s no need to procrastinate on gathering your documents. You can file earlier—and you’re more likely to remember your expenses and earnings in 2020 if you file closer to this year.
Right now, start gathering your invoices to see what you earned from customers. Instead of waiting until January to pull your receipts retroactively for the year, begin collecting your receipts and other financial documents now. Getting a jump start on this process will save you a lot of headaches later while also giving you the opportunity to maximize deductions.
Forecast for Next Year
Financial forecasting is the process of estimating your costs and profits for the year ahead. Forecasting can help you to budget over time and set goals for growth. For example, if the month of March is typically the biggest for your business, you can allocate a larger marketing budget and set goals to increase your income during that month, helping your company through the rest of the year.
When forecasting for 2021, you may want to compare your sales to both 2020 and 2019 if you were in business during that time. The COVID-19 pandemic has created strange and unpredictable buying trends, and your forecast might be closer to 2019 non-pandemic levels looking ahead.
Forecasting doesn’t correlate directly to taxes, but it’s a good process to follow when you’re already sorting through your expenses and considering your annual performance.
Use Sunrise to Prepare Your Financials
A good financial app can help you to sort through your earnings and expenses with ease. If you were disorganized or confused about your income this year, gain insight into your business in the new year with a fresh organization system. Sunrise is free for small business owners and has many of the features you look for in a bookkeeping tool. Try us today and see how our app can help.