Income tax filing season can be a trying time for small-business owners, even more so in a recession.
One of the biggest pitfalls owners are likely to encounter is a perennial one: poor record keeping that makes it hard for them not only to complete their returns but also to know where they stand financially. Another common problem is keeping up with changes in the tax laws, especially for state and local governments that are looking for ways to increase revenue.
Ask tax professionals what their clients struggle with, and haphazard books and ledgers is often the first answer. Many business owners don't know how much money they have on hand, how much they owe and what their clients owe them.
"You really need to control your books and understand what you're making," said Jeffrey Chazen, a certified public accountant with the Eisner accounting firm in New York.
Some business owners use their checkbooks and credit card bills as their records. But it's a problem when "they can't locate all their check registers or all of their bank statements," said Gregg Wind, a CPA with Wind Bremer Hockenberg in Los Angeles.
Others are even more disorganized, with boxes or piles of invoices, receipts and canceled checks that need to be sorted. CPAs ruefully refer to these people as "shoe box clients." These business owners risk missing important deductions and can end up overpaying the government. Or if the government questions a deduction, you could lose it if you don't have documentation.
The answer is to use a computer application to keep your books, one that interfaces with tax preparation software. But many owners don't use such programs because they don't have the time to input the information. Well, they can spend the time throughout the year keeping their books or spend even more time trying to figure things out before April 15.
The solution for many owners in this plight should be to get help, whether it's a bookkeeper to take care of ledgers and a tax professional to handle returns, or both. It may be too late for 2008, but it's still early in the new year and a good time to get organized.
Badly kept records are a particular problem for owners with home offices or who use cellphones and vehicles for both personal and business purposes. They need to keep good personal as well as business records.
