Tax time is stressful for all of us. But for small business owners, this time of year can cause additional anxiety when it comes to navigating the preparation and filing of the federal and state tax returns that are required. With the passage of new tax legislation in January, even seasoned small business owners are feeling added stress this year as they prepare to file.
Particularly if you’re a new small business owner, tax time may be unfamiliar territory altogether. While it’s always best to get the help of a tax preparation professional, there are a few things you can do to prepare ahead of time and ideally reduce some of the stress associated with filing your business taxes. That way, you can be sure you’ve collected all of the information you, or your tax preparer, will need to include on your business tax return.
Determine what type of form/return you need to file
Federal tax filing obligations and due dates are based on the manner in which you set your business up and whether your business operates on a calendar or fiscal year.
- Sole proprietorships. If you’re a sole proprietor, you will need to report your income on a Schedule C (Profit or Loss From Business) as part of your Form 1040 U.S. Individual Income Tax Return filing. This does not require filing a separate return and the filing due date is the same as the personal return for calendar-year taxpayers (which falls on April 17 this year). A Schedule C allows you to report the net profit and loss of your business. You will also need to include a Schedule SE (Self-Employment Tax) with your return.
- Partnerships and limited liability companies (LLCs). If you set your business up as one of these, you will need to file Form 1065 (U.S. Return of Partnership Income) to report income and loss to the IRS. Partnerships are also obligated to furnish copies of Schedule K–1’s (Partner’s Share of Income, Credits, Deductions), to each of the business’ partners or LLC members by the filing date for Form 1065. The due dates for Form 1065 are the same as those for sole proprietor returns.
- Corporations. If your business is structured as a regular corporation, you are required to file Form 1120 (U.S. Corporation Income Tax Return). For calendar-year filers, the due date is a month earlier than for individual income tax returns — on March 15. Fiscal-year corporations must file their returns by the 15th day of the third month after the end of your corporation’s tax year.
- S-Corporations. If your business was established as an S-Corporation you must file Form 1120S (U.S. Income Tax Return for an S Corporation). As with a partnership, you’re required to provide shareholders with a copy of a Schedule K–1. The due date for S-Corporations is the same as for regular corporations.
Get your financials in order
You will need a complete balance sheet and profit and loss statement for your business. This will allow you or your tax preparer to easily complete the returns. A profit and loss statement will detail your income and expenses, and a balance sheet will reflect your assets, liabilities and owner’s equity (or your stake in the company).
Make sure you have a good bookkeeping and payroll system in place so that all of the information is correct at the end of your business year and will accurately support the preparation of your business tax returns. It’s also a good idea to always have updated versions of these records in the event you want to valuate your business for a potential sale.
Know and Report Your Tax-Deductible Expenses
The IRS allows you to deduct the operating costs of running your business so long as they are “ordinary and necessary.” Ordinary expenses include those that are common and accepted in your field of business. Necessary expenses include those that are appropriate and helpful for your business.
Here are some of the allowable business deductions, according to the IRS:
- Equipment purchases. IRS Code Section 179 allows business owners to fully deduct from taxable income a limited amount of the costs for new business equipment. These can be deducted in a year, rather than depreciating the cost (deducting a portion of the purchase) over several years.
- Business expenses. Some of the common expenses associated with doing business can be deducted on your business taxes. These include business insurance, advertising expenses, legal fees, professional services, rent and utilities, employee wages and professional association membership dues.
- Auto expenses. Many small business owners use a personal vehicle for business purposes. To that end, the IRS gives business owners the option of deducting actual business-related auto expenses or claiming a standard mileage deduction. The amount you can deduct for miles driven changes regularly, so make sure to check with the IRS if you’re filing your own taxes.
- Meals, entertainment and travel. Prior to the passage of The Tax Cuts and Jobs Act of 2017, both meals and entertainment expenses were deductible. Taxpayers could deduct 50 percent of business meals and entertainment and 100 percent of in-house meals or those provided for the employer’s convenience. Under the new tax legislation, however, entertainment is no longer deductible and meals of all kinds are limited to a 50-percent deduction rate. Business owners can also deduct ordinary and necessary expenses incurred while traveling on business.
By getting all of these details in order prior to filing your taxes you can ensure that you, or your tax preparer, will have all of the necessary information to file an accurate and timely return for your small business. These preparatory steps will help you ease some of the stress and anxiety associated with tax time.
VISIT THE SOURCE ARTICLE
Author: Bruce Hakutizwi