How to Prepare Taxes for a Small Business

Getting started

As with all business ventures, getting it right at the beginning is of utmost importance as is ensuring that every area of the business is covered so you can build a foundation that will support the business going forward.

So, it makes sense that getting help early in the establishment of your business can save you from experiencing problems in the future. The most important factor you will need to address before you open the doors of your business is your tax obligations and how to fulfil those obligations. Paying tax is an integral part of running a small business. Mistakes with your tax can cost you time and money, possibly leading to unnecessary worry and stress, and a possible impact on the business.

Consulting a Tax Professional

To avoid any possible pitfalls, it is recommended that before you get your business up and running you consult a tax professional about all the factors of the setup of your business such as:

• the type of business
• the running of the business
• what you need to do to prepare your taxes and
• the annual cost of tax preparation so you can factor that cost into your budget.

Keeping your tax professional in the loop

It is important to keep your tax professional up to date as to what is happening in your business, as keeping in contact with them regularly will help them to understand your business and its specific tax needs. They then will be able to support you through any challenges that may arise. It makes sense that if the tax obligations of your small business are adhered to it will make the everyday job of running your business much easier.

Never delay from contacting your tax professional if you have a problem of any kind to prevent the problem escalating and maybe accruing a cost.
Providing misinformation and poor recording of anything related to your tax obligations inevitably will lead to problems in the running of the business and unnecessary stress on you.

The first year

As soon as you start up your small business, you need to plan for how you will pay the tax you will owe each year when you lodge your tax return.

So, what will you need to know about preparing the tax for your small business?

Some important points you will need to consider, include:

• when does the payment of your tax and other obligations start?
• how do you go about setting up the most efficient way to record and process the business’s income and expenses?
• establishing a clear understanding of your obligations as far as paying tax for a small business is concerned before you open for business.
• understanding the implications of the structure you choose, both tax and legal
• if you are you going to be working from home being aware that there are specific guidelines about the expenses you can claim.

Paying tax for your small business in your first year

In the first year of business, you can stay on top of your tax obligations by:

• paying tax pre-payments into the tax bill account you have set up
• ensuring that you put sufficient money aside for your expected tax bill
• voluntarily entering into paying instalments.

Keeping records for your small business

Accurate and up to date record keeping is essential from day one and will support your business to run smoothly.

Your tax professional’s role is to offer you information that will support you with this. They will keep you up to date with any changes in the tax laws and guidelines to make sure those changes are implemented into the daily running of your business.

Using technology to run your business, such as point of sale software, accounting systems and mobile apps can save you time and help you report easily and accurately, ensuring you have a clear picture of the state of your business at any given time.

Make sure you conduct regular reconciliation processes by cross-checking figures with your bank statements using till tapes, tax invoices and receipts for example.

You must keep all records, including income and expenses for five years.

Get your income and expenses right from day one

The accuracy of your reports is essential for the preparation of an accurate tax return.

Income

• You are obliged to report all income paid to your business, even if you have been paid in cash, or money has been paid into a private account.
• The ATO uses data matching and benchmarking to help them identify hidden activities, so honesty is the best policy.

• The figures you report need to be exact, so the keeping of accurate and complete records from day one is imperative. Trying to ‘make a guess’ after the event will not support the preparation of your tax return.

Expenses

• If you operate your business as a sole trader or partnership, you can claim a deduction for the costs of running your business from home.
• There are two types of expenses for your home-based business – running expenses and occupancy expenses.
• No matter which type of business you are running it is important that you ask your tax professional about what expenses you can claim.
• Make sure any expenses are genuinely related to your business, and that you have all the documentation required to back up your claim if required.
• The percentage of your office space of the total area of the house determines the percentage of expenses you can claim.
• You can claim that percentage of mortgage interest, rent, power, rates, insurance, phone and internet, repairs for example, but ensure that you keep detailed records and all receipts.

Reporting

Once your business is up and running, you will need to report your business income and other tax information. Your tax professional will guide you through this process.
The key reports you should be aware of are:

Business Activity Statement (BAS)

The main taxes you will report on will be:

• GST (if you are registered for GST)
• any tax you withhold from your employees’ pay.
• instalments towards your own tax once you are in the ‘pay as you go’ instalments system.

Income tax return

• to report your personal and business income and claim deductions.

Factor 1 have a team of highly experienced tax professionals that are here to guide you through all aspects of your business, including small business tax preparation, and to answer any questions that you may have. We look forward to supporting you through all the stages of your business venture and into the future.

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Disclaimer: the information contained in this article is for general information purposes only and in no event will Factor1 or its affiliated entities be held liable for any loss or damage caused through the use of this information. Independent advice is recommended for all individual circumstances. Data and specifications included correct as at May 2021.

References:
1. https://www.ato.gov.au/Tax-professionals/TP/Tax-Time-Toolkit—Small-business/