As soon as you recover from filing this year’s tax return, do the following:
1. Organize your files.
Get a manila folder, label it “2011 Tax Stuff,” and fill it with white file folders. Now, get your tax return. Go down the list of income items and deductions (a tax return is nothing more than a complicated income statement when you get right down to brass tacks), and label each file folder with the same name as a line item on the return. When you are finished, collect the file folders and put them in the manila folder in the same order as the items appear on your tax return. On the last day of each month, take all of your invoices, bills and tax documents and place them in the appropriate file folder. So, for example, a receipt for a business dinner would go under “Meals”; a bill from your lawyer would go under “Professional Expenses.” Next year, all you have to do is total the items in each file folder and write the total in on the appropriate line item of your tax return (or type it into TurboTax).
2. Dedicate your credit and debit cards.
When you use multiple credit and debit cards for your business, dedicate them to specific tax-deductible expenses. So, for example, use only your American Express card for buying your equipment and supplies; use only your MasterCard for your rent. That way, when it comes time to total your expenses, you only have to look at one set of statements.
3. Escrow your estimated taxes.
If you pay estimated taxes four times a year (in other words, you have a tax liability of more than $1,000 from self-employment activities), make sure you always have enough money to pay the taxes each quarter. Put aside a little money each month (20 percent to 30 percent of your gross receipts is a good number if it won’t strap you too much for operating cash) in a separate bank account (preferably a savings account or other interest-bearing account), and use that money to pay the taxes on each quarterly date. If you run out, use your business checking account to pay the balance.
4. Buy lots of tax books.
It’s up to you, not your accountant, to learn about every tax deduction your business qualifies for. There are literally tons of books out there to help you do this — they list virtually every business deduction in the federal tax code (sometimes even alphabetically), so all you have to do is
go through the list and mark off the ones you may qualify for. Some of my favorites are 422 Tax Deductions for Businesses and Self-Employed Individuals, by Bernard B. Kamoroff; J.K. Lasser’s 1001 Deductions and Tax Breaks 2011, by Barbara Weltman; several good books by Nolo Press (www.nolo.com) — they even have form documents and sample tax returns. If you sell online, The eBay Seller’s Tax and Legal Answer Book, by (ahem) Cliff Ennico.
5. Get a bigger mileage deduction.
Buy a mileage record book (you can get them on eBay), and stick it under the driver’s side sun visor on your car where you can get to it easily. Each time you take a business trip, set your trip meter to “zero.” When you get to your destination, write down in the mileage record the total on the trip meter, and then set it back to “zero” again. Many businessowners grossly underestimate their tax-deductible mileage and with the IRS mileage rates going down this year, you need every last mile you can get.
6. Learn to use TurboTax.
Don’t do your return by hand anymore. Buy TurboTax and learn how to use it. If you are already using QuickBooks, you are crazy not to — QuickBooks and TurboTax are made by the same company, and with a few mouse clicks, you can turn your QuickBooks bookkeeping records into a completed tax return on TurboTax without having to translate “book accounting” language into “tax accounting” language.
Having bought these books and software programs, be sure to deduct them on next year’s tax return.