As we approach the end of the year, small business owners need to shift their focus toward tax preparation. The fourth quarter is the perfect time to get ahead of your federal taxes and avoid the stress of scrambling at the last minute. By taking proactive steps now, you can ensure a smooth tax season and even uncover opportunities to reduce your tax liability.
Here’s a guide from Blue Ocean Tax Advisors on what to do in Q4 to prepare for your federal taxes as a small business owner.
1. Review Your Financials
The first step to tax preparation is a thorough review of your financials. This includes examining your profit and loss statements, balance sheets, and cash flow. Make sure everything is up to date and accurate. Small errors or missing transactions can lead to problems when you file your return.
Now is also a good time to reconcile your bank accounts, credit card statements, and other financial records. Catching discrepancies now will save you time and frustration later.
2. Track Business Deductions
Ensure you’ve properly documented and categorized all your deductible expenses. Common deductions for small businesses include:
- Office supplies and equipment
- Business travel and meals
- Marketing and advertising costs
- Rent or home office expenses
- Employee salaries and contractor payments
- Professional fees (legal, accounting, etc.)
By maximizing your deductions, you can lower your taxable income and reduce your tax bill. Make sure you keep detailed receipts and records for all business expenses to back up your deductions if necessary.
3. Consider Year-End Purchases
Need new equipment or office upgrades? If your cash flow allows, Q4 can be a good time to make year-end purchases that qualify for tax deductions. Section 179 of the tax code allows small businesses to deduct the full purchase price of qualifying equipment and software in the year it was purchased, rather than depreciating it over time.
This can be a significant tax-saver, but be mindful of your cash flow needs before making big purchases.
4. Evaluate Your Tax Payments
By Q4, you should have a clear picture of your business’s income for the year. This is the time to evaluate whether you’ve made enough in estimated tax payments throughout the year. If you’ve underpaid, now is the time to make a final estimated tax payment to avoid penalties from the IRS.
If you’re unsure how much to pay, a tax advisor can help you calculate an accurate estimate based on your profits, deductions, and credits.
5. Review Employee and Contractor Payments
If you have employees or independent contractors, make sure you’re on track with your payroll taxes. You’ll need to file W-2s for employees and 1099-NEC forms for contractors early in the new year, so it’s important to review your records now and make sure everything is in order.
For contractors, double-check that you have up-to-date W-9 forms on file. These forms are crucial for reporting payments correctly to the IRS.
6. Take Advantage of Retirement Contributions
If you haven’t contributed to a retirement plan yet, Q4 is your last chance to do so for the current tax year. Contributions to retirement accounts like SEP IRAs, SIMPLE IRAs, or 401(k)s are tax-deductible and can significantly reduce your tax burden.
Talk to your tax advisor about setting up or maximizing your retirement contributions before year’s end.
7. Plan for Next Year’s Tax Strategy
Tax planning doesn’t end when the year does. Use the last quarter to reflect on your business’s performance and set goals for the coming year. Are there tax strategies you could implement now to save more next year? Should you consider changing your business structure (e.g., from a sole proprietorship to an LLC or S-Corp) for better tax benefits?
Let Blue Ocean Tax Advisors Help You Prepare
Navigating tax preparation as a small business owner can be overwhelming, but you don’t have to do it alone. At Blue Ocean Tax Advisors, we specialize in helping small businesses get their finances in order and minimize their tax liabilities. Let us help you navigate Q4 with confidence and ensure you’re ready when tax season arrives.
Contact us today to schedule a consultation and get started on preparing your federal taxes.