The advent of February indicates that only 74 days remain before April 15—tax day. Tax preparation can be daunting to small business owners. Where to begin? Did I keep the right records? Am I a more likely candidate for an audit than a larger business? Am I taking advantage of all the deductions I can? Where can I turn for help? Fear not. With a bit of work, a lot of patience, and some of your time, you can make it through tax preparation successfully.

Friend or Foe? Believe it or not, the IRS offers plenty of free resources to help guide you through some tough tax issues—both in preparing your return and in planning throughout the year. Their website at www.irs.ustreas.gov has a wealth of resources waiting for you at the click of a mouse. (See side-bar.)

Tax Law Changes. The Taxpayer Relief Act of 1997 made sweeping changes to tax law. Most of the changes affect individuals, although some do pertain to business owners. Business tax changes include alternative minimum taxes, extension of expiring provisions, electronic tax deposits, home office deductions, and self-employed health insurance. (The exciting news about self-employed health insurance expenses is that the deductions have been increased. In 1997, 40 percent of these expenses are deductible, a figure that gradually increases until 100 percent of these expenses are deductible in 2007.) Many of the Act’s changes will not affect businesses until the 1998 tax year, so be sure to review the changes carefully with your tax advisor.

Common Oversights. Small business owners are very talented at their core business, but may be less astute when it comes to financial manners, particularly tax preparation. According to Barry Musser, CPA, of Hamilton & Musser, P.C., most businesses do well, but sometimes overlook available opportunities. For instance, Mr. Musser says many small businesses overlook the ability to deduct pre-tax, out-of-pocket healthcare expenses, such as vision, dental, and other similar expenses. Taking advantage of these tax benefits requires some planning, but can be very valuable in the long run. A second example is when small business owners bring equipment into their business, generally during start-up, that they paid for prior to establishing their business. Many business owners don’t realize that this equipment often qualifies for depreciation when it is put into service. A third issue frequently faced by business owners is clarifying who is an "employee" versus a "subcontractor." The tax consequences of this classification can be significant, so work closely with your tax advisor to understand the difference.

The Eagle Eye. "Audit" is a concept that instills fear in the best of us. Mr. Musser says that generally small businesses are not more likely to be targeted for an audit than larger businesses. However, poor or sloppy preparation of your return may raise questions with the IRS. Be conscientious, keep careful records, and work closely with a qualified accountant to prepare your return.

If you’ve turned your hobby into a part-time business, Mr. Musser advises you to be familiar with IRS hobby/loss rules. If your business does not show a profit three out of five consecutive years, the IRS could consider the activity a hobby (not a business) and may choose to investigate further. If you find yourself experiencing these losses, be prepared to show the IRS the seriousness of your venture. Have a business plan. Be able to explain extenuating circumstances, such as economic variables or the longer time frame needed to reach profitability. Be prepared to show the steps you are taking to rectify the situation.

Keeping Records. Circumspect record keeping is crucial to your financial success and will make your tax preparation much easier. Mr. Musser advises small business owners to keep business and personal bookkeeping completely separate. It’s very easy to commingle the two, which makes it more difficult to identify income and expenses throughout the year and at tax time. One of the first and easiest things to do is to open a checking account for your business. Your bank may be willing to waive minimum balances and other requirements until you’re on your feet. If you’re already up and running and don’t have a business checking account—go visit your bank today!

Many software packages are available to help small business owners organize their finances throughout the year. Several accountants I spoke with recommended Quickbooks as a comprehensive resource for business owners. Ask your accountant what he or she recommends for your specific situation.

Be prepared. The best advice Mr. Musser offers to small business owners is to take the time, energy, and money to seek professional advice from a Certified Professional Accountant. CPAs have the knowledge and expertise you need. Small business owners may balk at spending money on professional assistance, but will often save more money than the professional consultation will cost. The better prepared you are (i.e., the more organized your records are), the less tax preparation will cost you. If an accountant has to go back throughout the year and reconstruct your financial activities, charges can accumulate quickly. (Even if this is the case, spend the money to get things straightened out now and establish your footing for 1998. It’s never too late to get off to a good restart.)

When choosing an accountant, look for someone who is familiar with small business law and will be able to identify the benefits that await you and the pitfalls that you should and can avoid. Your accountant should have the resources to answer your specific questions (e.g., payroll, business formation, and tax liability) as well as guide you through unfamiliar territory.

The future. Start now in planning for 1998. Find a trusted, reliable accountant. Buy that software package. Take advantage of the free IRS resources available to you. Your common sense, combined with professional guidance, will lead you forward into great rewards.