Guiding your clients during this years’ filing season can prepare them for a successful tax season and even future proof their business.
Filing taxes are essential for every business, regardless of size, and the small entrepreneur is no exception. While the tax preparer may find that the process of filing taxes for small business clients may not be as complex as filing taxes for a larger business, it may not seem that way to your clients, especially first-year small businesses and solopreneurs. In fact, first-time filers (or filers using a professional for the first time) may feel overwhelmed or see the various steps of using a tax preparation professional as complicated.
To have a successful – and less stressful – 2021 tax season, your clients will need to consider many things such as, tax forms, tax exemptions, tax law changes, etc. While all these things apply to their business, they may not consider them throughout the year. Educate your clients on how to set themselves up for success, and as part of the pre-filing process, discuss these tips with them:
Tip #1: Organize and Compile Documents
Every tax prep process starts with the organizer or questionnaire. While these don’t need to be completed in their entirety, the more detail your client can provide, the better you – and they – are set up to prepare and file their taxes quickly and accurately. Impress upon your client the need for them to complete as much of the organizer as possible.
How to support your clients: If you, like much of the country, are working largely remotely and not meeting with clients in person, your clients may have concerns about providing sensitive personal data. Consider a secure portal to provide your clients with a secure option to send their organizer and other tax documents electronically. With CCH iFirm Client Portal, a cloud-based solution, your clients can submit those documents quickly and securely.
Tip #2: Keep Adequate Records of Expenses, Previous Returns, and Payroll Reports
One crucial piece of the tax prep process is making sure your clients have their financial records intact. The IRS requires all business owners to keep previous returns and associated documentation substantiating any deductions and credits for a minimum of three years. Good recordkeeping will allow your clients to prepare their financial statements adequately and could also come into play if they’re ever audited. The IRS doesn’t have a statute of limitations for how far back they can audit.
How to support your clients: Discuss record retention best practices. While the IRS requirement is three years, it’s better to err on the side of caution. Ensure your clients understand they should keep all documentation for as long as they may need to prove income or deductions. Those records need to include every expense tied to their business, such as bank deposit receipts, credit card receipts, bank statements, etc. Small business owners should also keep gross receipts for a minimum of three years from the date of filing taxes.
Tip #3: Become Familiar with Common Tax Deductions and Regulatory Changes
2020 brought a lot of changes to the tax front due to the pandemic. Many of those changes came directly from the federal level and influenced several tax regulations. Those regulations also added to the list of eligible tax deductions for business owners and, more specifically, small business owners as well. Many small business owners worked from home pre-pandemic.
How to support your clients: Make sure you’re staying on top of those regulatory changes to inform your small business clients of the tax deductions that apply to them. If your clients are running their business from their home, they can take advantage of the home office tax deduction. Your clients can deduct a portion of their mortgage, rent, utilities, and even repairs. Other common tax deductions include self-employment tax, QBI (Qualified Business Income), loans, business supplies, insurance, and even the cost of starting your own business if it’s their first year.
Tip #4: Be Aware of Tax Dates and Penalties
The pandemic has rearranged the entire tax landscape of tax dates and penalties. Quarterly estimated tax payments? 1099-NEC due? Those items have due dates that you should remember and sent as a reminder to your clients. It is incredibly important to keep a tax calendar to ensure your clients are on top of those tax due dates.
How to support your clients: Make sure your clients know the various deadlines that may affect them. State and local tax calendars may vary from the federal level so ensure your clients are familiar with their state tax deadlines and penalties. Any missed dates can result in stiff penalties that your clients might have to pay extra for in the long run. The IRS is also a reliable resource for staying on top of tax dates.
Tip #5: Understand the Impact of COVID-19, PPP, PP2 and the CARES Act
Those changes that 2020 brought with it has introduced new tax regulations and relief programs. Much new legislation was put into place to protect business owners from the financial fall out of Covid-19. The PPP (Payroll Protection Program) loan is a loan that many small business owners have taken advantage of during this pandemic. The U.S. Chamber of Commerce stated that “more than $500 billion of these loans were distributed in 2020 alone, making PPP an enormously popular choice for small businesses hoping to recover.”
The CARES Act has added to the confusion of ever-changing tax regulations surrounding these legislations. Your clients will need to know how to navigate the process of filing whatever was used in these programs. For instance, if 60% of the loan they borrowed was used towards employee payroll costs, the PPP loan can be forgiven.
Keeping up with the rapid pace of regulatory and tax legislation changes can be very challenging. Make sure as a preparer that you have adequate research in your tax software so you can always stay on top of new tax developments. With CCH® AnswerConnect, you can stay on top of regulatory changes, with notifications of legal and regulatory changes, with information you can share with clients to educate them on how the changes may affect them. CCH AnswerConnect is a comprehensive tax research platform that allows you to quickly access IRS form instructions and schedules and stay on top of tax alerts for ever-changing tax laws and developments.
Overcoming the challenges of a post-pandemic world is a consistent client concern. The last thing you would want to do is set your client up for failure by not fully preparing them for the upcoming busy season. Guiding your clients during the tax process will prepare them for an efficient filing season and even help future-proof their business.
Setting your clients up for success also helps set your firm up for success, helping increase client loyalty and the likelihood that they’ll come back to you year after year. Use these best practice tips for seasons to come and support your clients while growing your firm.
Make sure you stay ahead of those tax deadlines and get access to resources that will get you through the 2021 season. Download the Small Business Tax Prep Checklist today!