2020 has been a year like no other, so preparing your 2020 taxes will likely be different than in years past, too. While there remain the typical standard procedures interior designers should follow, a set of tax law modifications prompted by COVID and other implications of the CARES Act have created some changes that interior design business owners need to be aware of.
This article will take you through everything you need to know to get your interior design business ready for tax season this year.
Bookkeeping Basics for Small Businesses
Of course, the best way to get your taxes together for tax season is to be on top of your financials throughout the year. Our previous article on how to build a tax preparation strategy can help you smoothly sail through tax season going forward is a comprehensive guide to small-business bookkeeping, but here are a few quick bullet points to give you the basics:
- Do not mix personal and professional finances. As simple as that.
- Reconcile your bank and credit card statements at least monthly, if not weekly. It’s much easier to rectify a mistake caught early on.
- With the help of your bookkeeper, make a daily, weekly, monthly, quarterly, and annual checklist of bookkeeping duties. Daily responsibilities should include compiling expenses, filing receipts and double-checking data entry.
- While you will need to work with a sales tax professional who knows the federal and state laws to develop a strategy for submitting proper filings, as a business owner you must take responsibility for overseeing implementation of that strategy.
- Be sure to categorize your assets and liabilities properly – not doing so is a common accounting mistake that can dramatically impact the accuracy of a balance sheet.
- Naturally, we suggest you take advantage of Design Manager’s best-in-breed data entry, and financial reporting capabilities to make sure all of your data is recorded and available at a moment’s notice.
Tax Prep Tips for Small Businesses During Tax Season
In an ideal world, we are preparing for tax season all year long, following our weekly, monthly, quarterly, and annual checklist. But realistically, many interior design business owners will have some catching up to do as the tax deadline (either March 15 or April 15, depending on your business’s legal entity type) approaches. The tips below are based on your using Design Manager, which is an accrual-based program, but these tips apply however you’re doing your taxes..
- Denise Zollo of S&S Tax and Financial Services says this is the time, if you haven't already, to review your Cost of Goods Sold (COGS) Accrual, Work In Process, Vendor Deposits, and Client Deposits reports for items that need to be addressed.
- All of your estimated federal and state tax payments should be organized. Priya K Srinivasan, CPA, says your accountant will be thrilled if you code your estimated tax payments in Design Manager under shareholder distribution/owner draw if they were paid out of the business bank account.
- For Sales Tax, break out revenue by state if you are operating in more than one state which is easy to do using Design Manager’s sales tax reporting.
- All business expenses should be accounted for, including those accidentally put on a personal credit card. These can be entered in Design Manager by debiting the respective expense and crediting the Shareholder Distribution/ Owner draw.
- Tax documents received like 1099s and charitable donations made, should be available to your tax preparer.
- Priya also points out that a 1099-NEC should be issued to all contractors who provided more than $600 for services and were paid by means other than credit card. This is a new form for payments to contractors. The old form 1099-MISC will still have to be used for payments to attorneys and for rent.
- For wages, many states want taxes withheld if remote workers are working in their state and the business is in another state, so make sure you mention remote workers you have in other states to your tax accountant.
Using Design Manager to Clean Up Your Taxes
Snafus can happen, and Anup Thakkar of Ledger Financials says it’s possible to undo tricky problems, especially if you have Design Manager. Here’s how Anup says you can use Design Manager to fix various accounting problems, by organizing these key reports:
- The Work In Process Report: These are items that have been paid for to the vendor, but not yet invoiced to the client.
- How to do it: Clear the items that are completed/installed for the client, by creating a client invoice. In some cases, if you do not intend to bill the client, you can create a zero-invoice by overriding the amount while creating the invoice. Creating a client invoice is the only way to clear an item from the Work In Process (WIP) report.
- How it helps: Once the client invoice has been created, the amounts will drop from the WIP and the client deposit reports, and then transfer properly to the accounts receivable accounts.
- The Client Deposit Report: With this report, you can identify if any installations are complete, but the client has not yet been invoiced, regardless of whether the Vendor has been paid or not.
- How to do it: You should clear the items that are completed for the client by creating a client invoice. In some cases, if you do not intend to bill your client, you should create a zero invoice by overriding the amount while creating the invoice.
- How it helps: Once the client invoice has been created, the amounts will drop from the client deposit report and transfer to the accounts receivable accounts. Income will also get recognized on the P&L.
- The Open Purchase Order Report: An Open Purchase Order report can be closed by creating a vendor invoice or it can be done manually.
- How to do it: Review the report and identify the POs that have already been paid in full, but are still open. If there is no balance due, and all the payments on the PO have been entered, you can clear the PO by creating a vendor invoice for the zero amount. If you conclude that the amount on the PO is not payable, close the PO manually. If the amount is due, the PO will remain open.
- How it helps: Once a PO is closed through a vendor invoice, the cost is transferred to WIP or COGS, depending on the status of the client invoice. If client invoicing is done, the PO amount will be transferred to COGS and if the client invoicing is pending, the cost is transferred to the WIP account. If a PO is closed manually, there may or may not be an impact on the P&L.
- The Open Vendor Deposit Report: This will help to identify any items that have been paid through a PO, but the vendor invoice is not yet recorded because the item has not yet been received or installed. If there are any returns, etc., that have not yet been recorded in Design Manager, they can also be identified by reviewing this report.
- How to do it: Once determined whether the items are delivered or installed, review the final vendor invoice to be entered in the system. If the vendor invoice is not available, you can create one in Design Manager and clear the amount from the report.
- How it helps: When you record the vendor invoices, the cost is transferred to WIP or COGS, depending on the status of the client invoice. If client invoicing is done, the amount will be transferred to COGS and if the client invoicing is pending, the cost is transferred to the WIP account.
- The Accounts Receivable and Accounts Payable Reports: These will help you identify if there are any old receivables or payables that need to be collected or paid and if they are not receivable or payable, then you can instruct your CPA to write them off.
- How to do it: Client invoices can be written off by using the option to adjust invoices, where you can directly select the general ledger account where you want to write off the amount.
- How it helps: This will create bad debt expenses on the P&L
Tax Tips If You Received PPP and CARES Act Assistance
If you received funds from the government’s Paycheck Protection Program (PPP), similar COVID-19-relief grants from city, county or state and/or Small Business Association loans, you must reflect that assistance as a stipulation of CARES Act. Both Priya and Anup shared their expertise to summarize everything you’ll need to prepare this additional part of your tax filing. Be sure to have ready:
- Details of the loan and how it was accounted for in your books.
- Details of any other Economic Injury Disaster Loan (EIDL) or advance or any other local or state grant to provide to your tax preparer.
- Details you received from the Small Business Association on forgiveness. Note that expenses paid with the PPP monies are fully deductible for federal purposes. State rules on this are different for different states.
- Forgiven principal and interest payments for SBA sec 7a, 504 and microloans, need to be separated in the accounting records, so please provide this paperwork to your tax preparer
- If the business had payroll and claimed employee retention credit, payroll deferral on payroll taxes, COVID related sick time, make sure all the details are available so that your tax preparer can verify all details.
- If the business did not have payroll, but still has COVID related sick time, you must have documented details of days off, so that your tax preparer can calculate the appropriate credit in your tax return.
- The CARES Act had a special provision on business losses. Individual and businesses that had losses in 2018, 2019 or 2020 can carry back the losses for up to 5 prior years and offset income in the prior years and get a tax refund. So, If your business did have an applicable loss, talk to your tax professional to see if you can take advantage of the carry back.
Preparing taxes for your interior design business this year will likely take extra effort than in years past, but starting now will help you get the job done with as little stress as possible. Working with bookkeepers and tax professionals who are familiar with the interior design business model will go a long way to ensuring you are filing properly. And of course, using a project management and accounting software like Design Manager can help you avoid any pitfalls to begin with.
If you’re not already using Design Manager, sign up for a free trial today to see how easy it can be to stay on top of your taxes!