Tax season for small business owners and those tasked with preparing and filing business taxes always brings about the same headaches, stresses, and perhaps worst of all, costly mistakes.
The problem usually stems from some variation on the same issue: A lack of organization, preparation, and record-keeping during the previous year. Inventory records, insurance information, and travel expense logs are just some of the documents you’ll need to have on hand when putting together your returns.
For very small businesses—sole proprietors and single-member LLC owners—there is no one else to blame for poor record-keeping. This article is mostly meant for them. But those who head up corporations and S corporations also need to invest properly in the tools and systems necessary for their employees to easily and accurately report and file.
The state of small business: Lacking in IT solutions
Wasp Barcode’s recent State of Small Business Report brought back some surprising findings on the mindset, expectations, and decisions of U.S. business leaders.
Perhaps most surprising was the lack of real investment in software that can help track the location and status of two of a company’s biggest expenditures: its inventory and assets.
According to the report, 43 percent of small businesses don’t track their inventory or use a manual process to do so. And 55 percent of small businesses don’t track assets or use a manual process.
Those are both incredibly high numbers considering the importance of inventory and assets, the fact that we’re well into the 21st century (so many other aspects of modern business have been transformed by technology—communication, collaboration, presentation, just to name a few), and how much companies suffer as a result of this oversight.
If you’re still using spreadsheets, know that this method is likely killing your inventory.
Why tracking inventory is crucial for tax filing
If you don’t use automated processes to track your inventory, you’re much more likely to have an inaccurate count (human error is just a natural part of life—don’t beat yourself up about it), which spells disaster for simply doing business.
You’ll be promising customers inventory that doesn’t exist, paying for warehouse space and insurance for items not on shelves, and, most importantly for this article, paying more in taxes for ghost inventory (or, conversely, paying less than you should on your inventory—something the IRS won’t be pleased about.
When filing, your inventory is valued at the cost at which you purchased it. If you have items that you can’t sell and are now worthless, that loss is reflected as a higher cost of goods sold. The higher your cost of goods, the more deductions you can take against your total income, cutting your taxed profits.
That’s why having an exact count of your inventory, from what you’ve sold to what you can’t sell, is so important. The last thing you need to do as a business owner is pay more than is necessary to the government for inventory you don’t own; or to trigger an audit that can cost your company thousands. In that case, you could be subject to fines, or lose your company altogether.
Why tracking assets is also a must
Your fixed assets are the long-term pieces of property that are used in the production of income, such as vehicles and computers. Their depreciation over the years is a vital part of tax filing, and is made worlds easier when done with automated asset tracking that can automatically calculate depreciation methods such as straight-line or double declining balance.
Another issue that business often run into with assets is the appearance of “ghost assets” on the company ledger. These are assets that are calculated as part of the tax bill but, surprise surprise, don’t actually exist. Maybe one of your employees took a mobile computer and left it at a job site; maybe a drone or warehouse vehicle was stolen from your fleet. The point is, things go missing, and though you may notice it, you may not remember to automatically remove it from the ledger.
Once again, this leads to higher-than-necessary tax bills, or incorrect filings that will have the IRS on your case.
Plus, we’re once again glossing over the fact that ghost assets and other issues with your assets that can be handled by automated asset tracking software—such as scheduling maintenance—is a huge drain on your business productivity, it two ways.
One, nothing holds up workflow worse than expecting to have a tool or crucial piece of technology on hand, only for it to be inexplicably missing. Asset tracking keeps tabs on every piece of the business you need, and holds people accountable for taking good care of them.
And two, you’ll have to spend way more hours, perhaps days or weeks, catching up on your record-keeping in order to file something that’s at least passably accurate. Why make your tax experts, accountants, HR workforce and other employees do the kind of busy work a machine can accomplish automatically?
No advantage to playing dumb
The IRS doesn’t differentiate between those who purposely lie on their returns and pretend they had a higher cost of goods, and those who were too lazy or uninformed to report accurate numbers. At the end of the day, you’re responsible for your business’ filings.
Additionally, those who continue to ignore inventory levels in the warehouse will find that there’s no advantage to keeping a larger stock on hand, since inventory can’t be deducted until they’re sold or deemed worthless.
If anything, you’ll want to keep stock counts low, pulling new inventory “just in time” for a new order. That will decrease your costs in regards to warehousing and insurance—just not taxes. Inventory management is even more crucial for businesses in certain markets.
All good business owners operate from a position of strength, which comes from having the most knowledge possible about all aspects of the company and its dealings.
There are too many variables that can lead to losses and eventually closure for a small or medium-sized business—not knowing how much inventory you have on hand, at what rate you need to be depreciating that new van you bought for deliveries, or where some of your biggest investments can even be found are issues you don’t need to deal with.
Go ahead and augment your record-keeping with automated asset and inventory tracking software. If it’s too late this year, don’t let next year’s tax season give you (and your accountant) yet another headache.
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