Wednesday, April 14, 2010

Tax Prep for the Lazy Person - do's and don'ts

Also titled: Lessons from April 2010

I've always been a DIY kind of gal. I'll paint the house, climb under my Jeep to change the oil, and figure out why the washer is making that funny noise. Taxes? Yeah, been doing them myself since I started. However, I've always filed a 1040EZ or 1040A and taken the standard deduction; 2009 is the first year I itemized.

The decision seemed to make sense: I started a business, I gave a whole lot of $$ to medical professionals for various reasons, and frankly I didn't make much to begin with. So I should do pretty well, right? Unfortunately, I caused myself two days of havoc and headache when I bit the bullet Monday and got down to the nitty-gritty.

Here are a few things I learned from doing my taxes this year. Some of them I didn't realize. Some of them knew but didn't apply. Others I could have figured out, if only I'd taken a few minutes to look or got some help. ("Oh, damn my eyes!" she says as she swoons...)

Hopefully if I send this out into the blogosphere, somebody else will read it and learn from my mistakes, rather than make their own!

Don't: collect everything in one big pile
Do: organize and maintain your records all year long
How many times have we heard and read how important it is to keep records? Well you should probably be doing that. And by probably I mean for sure. And I don't mean "Keep everything you'll possibly need sitting next to your computer so you can go through it at some undefined later time." Repeat after me: YOU WILL NEVER TAKE THE TIME. Well, at least not till tax time next year, which as we are exploring here is the wrong time to go through piles of paperwork!

Set aside a firm thirty minutes each and every month to input this data into your chosen electronic storage medium. Outright, Quickbooks, even a spreadsheet you make up yourself will do. And however much you can automate, do that too! It's so much easier to click "Import from PayPal" than it is to put it all in yourself, item by line item. Remember, the easier you make it for yourself, the more time you can spend creating!

Don't: leave things a mess in the name of speed
Do: set up a simple system
Imagine for a moment that it's time to pay your bills for the month. If you're like me, you take all your bills (power, water, cable, cell phone, student loans), to your computer, log in to your financial institution, and send them all checks through the magic we know as Online Bill Pay. You carefully note on the bill how much you paid, from what account, and when, and you throw it on top of an ever-growing pile on your left. What? How much harder is it really to turn instead to your right and file the same piece of paper in your filing cabinet under "Utilities?" Oh, you say your filing cabinet isn't next to your desk? Well perhaps you should move it.

Ergonomics is a two-dollar (and increasingly familiar) word that basically means organizing a work area in ways that make tasks easier and more efficient for the body to accomplish. Consultants get paid huge sums of money to tell companies both large and small, "Hey, if one task requires the use of two objects at the same time, maybe you should put those two objects next to each other." So think about the work you need to do and plan (or reorganize) your home office or your recordkeeping area to be more efficient. Then add Efficiency Expert to the ever-growing list of titles you're accumulating as a small business owner. And if you're paying yourself a wage by now, consider adding a bonus for implementing such a good idea. Hey, you're a reasonable person, you can recognize when you're adding value to the company! Sit down with yourself and have a good talk. I'm sure you'll be fair to you.

Don't: work too hard on the wrong things
Do: keep the right information
I spent a good five or six hours building spreadsheets of last year's handwritten income and expense reports - complete with sales tax collected, mileage driven, and qualifying utilities - only to find out I'd used the wrong information. See, when I built the spreadsheets, I wanted to know what my costs were, so I included all appropriate calculations. For example, I didn't list my rent for July, I listed the percentage of my rent that I got to write off in proportion to the size of my apartment and the size of my office. I didn't add up the number of miles I drove in August, I figured the dollar amount for each trip I took in August and added those amounts, along with toll fees, for each month.

So after several hours of diligent recording and figuring (and deciphering, and fighting Excel to make it do what I wanted), I opened Turbo Tax, secure in the knowledge that I was done with the hard part. Then I promptly had to go back and refigure everything, because TT is designed for people who don't want to do the math themselves.

My advice? Figure out what format your records need to be in before you spend all that time giving yourself carpal tunnel for no reason.

Don't: assume you'll get to it later
Do: build the time into your schedule
This is related to my first point about keeping good records in the first place. We've all heard it before, so here I go repeating it once again: Schedule time throughout the year to get this stuff done! Form healthy habits so that you don't leave yourself in the lurch whe you get busy. Once a month I pay my Etsy bill, and at the same time I enter all my reciepts for supplies, etc. At busier times of the year maybe I have to do reciepts more often so I don't get bogged down by it. But like anything else I know I have to do, it's on the schedule. Hell, at this point I have to put meals on my schedule too or I don't get around to them!

Point is, if it's important, you make time for it. And record keeping is definitely important!

Don't: assume the IRS thinks like you do
Do: organize your records based on the end need
How do you categorize your business expenses? I knew that business cards aren't in the same class of expense as beads or booth fees, but I didn't realize until yesterday that while beads and string fall under "Cost of Goods Sold," so do wrapping supplies. So all year I coded wrapping supplies and table drop cloths under "Point of Purchase" along with hang tags and signs, which actually qualify as Advertising expenses. Hence another reason I had to re-do my reports!

This is a very simple error to avoid. One easy way to get around it is to go to www.irs.gov and download the form used to report all business expenses. You don't have to use it, or even save it, but take you a look-see at what categories they use, and apply those to your own records.

If you specifically want to organize your expenses so that wrapping supplies are separate from beads but together with signs because it really does make way more sense, there are two ways you can approach that. The smart way is to sub-categorize signs, wrapping supplies, and beads so that you can add the sub-categories together as needed for different purposes, without redoing the work over and over again and making yourself go mad in white linen, as they say. The other way isn't so smart... (In my mind I can hear Eric Cartman, "I do what I want!")

Don't: think you know better
Do: listen to your inner promptings
The moral of the story is, when your little inner voice tells you in early 2009, "Gee whiz, I've never done this before. Maybe I should go talk to the SBA and see if I'm keeping the right kind of records," you oughta listen to yourself and go talk to the damned SBA in early 2009. Before your stubborn DIY tendencies run rampant and cause you two days of headache in April of 2011.

1 comment:

  1. Sounds like great advice, especially for those of us who are "accounting challenged".

    Cindy
    sidetrackedartist.blogspot.com
    artisticinspiration.etsy.com

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