Being a small business owner comes with its fair share of benefits, from flexibility in your schedule to the joys of being your own boss. However, there are some not-so-fun aspects of being a business owner, one of which is tax season.
Small business owners in the travel industry should understand how to properly prepare for tax season to avoid any surprises, like an unexpected tax bill. In fact, effective tax preparation starts well before January 1 hits.
Let’s go through a few different strategies that you can use to prepare for tax season, giving you the best chance of properly positioning your business for tax time and minimizing your tax bill to Uncle Sam this year.
Catch Up on Bookkeeping
Before you can analyze your tax position, you need to be sure your small business is caught up in bookkeeping. This includes reconciling all business transactions from your bank statement and business credit card in your accounting software. If you aren’t already using accounting software, it might be time to make the investment for added convenience and organization.
Although you should be completing reconciliations on a regular basis, it can be easy for your travel agency to fall behind, especially during your business months. If you log in to your software and find that you are months behind, block off some time in the upcoming days to get caught up, or hire a professional.
When catching up on bookkeeping, be sure you pay close attention to how your transactions are categorized. Although this might be time consuming up front, it can save your accountant a lot of time when filing your business returns.
It can also be beneficial to reconcile January of the next year as well. This helps ensure your business has the proper cutoff and there were no unusual items in January that should have been recorded in December.
Review Financial Reports
Once your bookkeeping is all caught up, you can begin reviewing the reports of your small business. You should review your accounts receivable aging and accounts payable aging schedules to see who still owes you money and what money you owe.
Travel agencies experience volatility in their cash flows, which can make it difficult to understand which revenue should be recorded on your income tax return. If you find any errors in these reports, take the time to find the root cause to avoid issues going forward.
In addition to those statements, you should analyze your income statement, balance sheet, and statement of cash flows. These items tell you how profitable your small business was during the year and indicate the financial health of your agency.
Create a Tax Plan
All small businesses should have a tax plan, regardless of if you file as a sole proprietorship on your individual return or on a separate business return. A tax plan is different from a business plan in that a tax plan only outlines the factors that impact your tax filings, while a business plan includes every detail about your business.
Your tax plan should outline your projected net income. This is how much profit you expect to make during the year. Then, the tax plan will go through ways you can potentially reduce your tax bill.
It can be more difficult to find effective tax planning strategies when you operate based on the cash method. Most independent contractors that file as a sole proprietorship will file using cash basis accounting on their individual returns.
Nevertheless, you still have strategies you can take advantage of if your own business is structured this way. This includes leveraging bonus depreciation for assets purchased during the year, taking auto and travel deductions, and the home office deduction.
Keep in mind that tax planning is generally only effective if the strategies are implemented before year-end. This makes it important to stay caught up on your bookkeeping throughout the year so you can tax plan before the new year hits.
Budget for Taxes
Another way you can prepare your travel agency for tax time is to budget for taxes throughout the year. This includes making estimated tax payments on a quarterly basis and understanding where you expect your bill to fall when filing taxes.
As a travel agent, you can expect varying revenue levels depending on when your customers take trips. It’s an excellent idea to have a separate bank account that you send a portion of your revenue to when you receive customer payments. This minimizes your risk of owing a large tax bill that you don’t have the cash flow to pay.
To properly budget for taxes, look at the amount of taxes you paid in the prior year. Then, at a minimum, ensure you put away that amount throughout the year. It’s important that you adjust for an influx of revenue. If you gain ten new clients this year, you want your tax budget to reflect this increase.
Contact a Tax Professional
As a busy travel business owner, it can be difficult to manage all of these items on your own. That’s why contacting a tax professional can alleviate some of the time constraints and lead to accurate and timely tax filings.
When searching for a tax professional, be sure they have the necessary experience and credentials, such as a certified public accountant license or positive reviews from clients.
A tax professional is not only important to work with during tax season but also throughout the year. From random questions that pop up to finding the right strategies to reduce your tax bill, having a trusted expert you can turn to is indispensable.
Many travel agency business owners dread tax season, but this doesn’t have to be the case for your business. Staying organized throughout the year with professional help might be the solution to your problems.
The right accounting team can ensure your books stay up-to-date and accurate, making tax filing a breeze. Reach out today to learn more.