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Making Money Matter: How Invoices Can Help You Manage Small Business Tax Deductions

How An Invoicing System Benefits Small Business Taxes
Photo by JESHOOTS.COM on Unsplash

Photo by JESHOOTS.COM on Unsplash

Making Money Matter: How Invoices Can Help You Manage Small Business Tax Deductions

Whether you’re a work-at-home mom or head up a major global corporation, a proper invoicing system is a critical part of any business. It’s how you get paid and helps to keep money coming in at regular intervals. It’s the only way to stay afloat and grow your business.

One of the most important areas where invoicing correctly can make a huge difference is with your taxes. With a decent invoice structure and system, you can easily see what taxes need to apply to your sales. Then, when it’s time to do your tax return, you can easily work out what you need to pay.

Taxes and a good invoicing or accounting system for your business are essential. They go hand in hand and are essentially an agreement between your business and the government. You agree to pay the correct tax based on your income, and the government uses your taxes to improve necessary areas or run programs focusing on improvement.

In a nutshell, your invoicing system is how you prove to the government that you’re paying the correct taxes.

What Is A Proper Invoicing System?

A proper invoicing system or invoice management consists of these 4 elements:

  1. A clear and professional invoice

  2. A method for tracking invoices and payments

  3. A schedule for sending out invoices

  4. A schedule for following up on payments

When you bring these elements together, you can control so much about your business finances and avoid costly mistakes. You know when money is due, how much is due, and which clients are paying on time or late. With this information, you can start to plan for the future of your company. You’ll have access to accurate data about when the lean months are and when you can expect bumper orders.

4 Ways Invoicing Correctly Can Help With Your Small Business Taxes

A proper invoicing system will ensure you’re always on top of your taxes. Here’s how:

  1. Invoices Are Sent Out On Time

Having a regular schedule for sending out invoices allows you to see each month exactly how much money your business has made. More importantly, for your tax return, you’ll know how much money has been invoiced for in that financial year or taxable period.

If you’re sending out your invoices helter-skelter, then it becomes harder to work out income for a given period. This, in turn, makes it harder to complete your tax return.

  1. You Have A Proper Record Of Income

Even a simple spreadsheet that you update manually and list your invoices for the month or the year, as well as the amount for the invoice and the date it was paid, will be sufficient to assist with your taxes. A record like this helps you to see at a glance what income you invoiced for and the money you received.

When completing your tax return, you don’t have to go hunting for income information. It’s all right there in one place.

  1. It’s Easier To Work Out Tax Accurately

When you have a clear system for invoicing and tracking payments, you will know exactly how much you’ve made in the tax year. You’ll find it a lot easier to work out your taxes for your return, as well as feel confident that you have the correct amount for your income on your return.

If you’re subject to a tax audit, you’ll have everything you need to prove that your taxes were filed correctly.

  1. You Can Avoid Penalties On Incorrect Tax Payments

Following on from the previous point, when you have the correct amount of income for your tax return, you can also feel confident that you’ll avoid penalties on the amount you declare. Penalties can be crippling for a small business because you are suddenly hit with a payment due that you weren’t planning for. When profit margins are low, which they so often are for a small business, this can be a hard pill to swallow.

Another bonus of having a decent invoicing system is that it becomes a lot easier to do your taxes each year. This means that you are less likely to be late filing your return and making payments, which means you’re less likely to be hit with late payment fees or penalties.

Build Your Invoicing System The Right Way

Now that you’ve seen how proper invoicing management and processes can save you time and money and assist with your business taxes, let’s look at how you can build a good system:

  • Start With An Invoice Template – A professional invoice template for your business should always be the starting point. Get your template set up with your company details, a clear structure for listing items on the invoice, obvious payment methods, and details on your payment terms. Once you have a template set up, it’s easy to complete an invoice and send it out for each sale you make.

  • Create A Way To Track Invoices And Payments – Now you need to stay on top of the invoices that you send out. This means having a way of clearly identifying each individual invoice. A numerical system works – start with 001 on your first invoice and start counting up with each new one you create. In addition to this, you need to have a list of all your invoices which includes the tracking number, the client, the amount, the date created and the date paid. An income statement template is an excellent way to keep track of all of this and to ensure you know how much revenue is coming in and how much money you’re paying out.

  • Set A Schedule For Yourself – Once you have your documents organized, you need to ensure that you’re organized too. As a busy work-at-home mom, this is crucial, and you should be well-versed in multitasking and planning by now. Use these skills to create a system that works for you. This can be setting aside a time to invoice once a week, once a month, or whatever makes sense for the way you operate. If you stick to your schedule, you won’t miss out on sending invoices to clients.

It’s Easy To Stay On Top Of Your Business Finances And Taxes

With a bit of preparation and setting a firm schedule for yourself, it’s simple to stay on top of your finances. This will allow your business to prosper and ensure that you have everything you need at your fingertips when tax season rolls around.

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