Tax season is around the corner. Getting everything together and filed can be really stressful, especially for business owners; but it doesn’t have to be. You simply need to know what you need and have it ready by the start of the filing season.
Primarily, you’ll need to:
- Know your numbers
- Know your mileage
- Know your home office expenses
Know Your Numbers
Your “numbers” are your annual net profit, to be exact. Hopefully, you are able to produce a Profit and Loss statement for the year because you’ve kept really good track of your books or had a bookkeeper working with you.
The Profit and Loss statement (P&L) will tell you (or your tax preparer) how much the business made in revenue, how much was spent in business expense, and the difference (profit or loss); all of which is needed to prepare the business portion of your tax return. An accurately-completed balance sheet is also helpful, but the P&L is critical.
Know Your Mileage
If you use your vehicle 100% for business, tracking vehicle expenses are easy. But if you use it for both business and personal reasons, you’ll want to track the number of miles you drove for business and separate that from the personal miles. Your tax preparer will need this number to give you credit for the business use of your vehicle (56 cents/mile for 2021). If you didn’t keep good track of your business miles, use your calendar to track old appointments and meetings, and get the total for those miles driven throughout the year. You’ll also want to report the parking and toll fees you incurred during the year.
Know Your Home Office Expenses
You may get a deduction for the business use of your home, but you’ll need to be able to provide some information to take advantage of it. Typically, these items should not show up on your P&L, but you can still use them to reduce your taxes. In order to claim the home office deduction, you’ll need:
- The total square footage of your entire home
- Square footage of your home office space
- Annual total for mortgage interest/property tax or rent
- Annual totals for all utilities
- Totals for certain repairs and improvements
Typically, you’ll be able to get a deduction for these expenses based on how much space your home office takes up (i.e. you’ll be able to deduct 8% of the total annualized expenses if your home office takes up 8% of your home).
To learn more about the home office deduction, you can get more information on the IRS website or ask your tax preparer.
Having all of these numbers ready in advance will save you a lot of stress, time, and potentially some money. So start early! And while you’re at it, start setting up some systems for next year so you’re gathering this information year-round. If you need support with this, be sure to contact us!