One Month to Go: Preparing Your Business for Tax Season
Even if a small business owner has an accountant or plans to hire one, some preparation beforehand can cut down on costs. Generally, if you can save the accountant time, the final bill will be more affordable.
The clock is ticking. It’s important to start preparing now instead of waiting until the last minute. Not only can you save yourself grief by being prepared, but you may lower your tax burden or increase your returns as well. For example, you may discover more opportunities to deduct costs.
To get started, check out our quick guide to preparing your small business for the upcoming tax season.
Different Business Structures Pay Different Taxes
There are many ways to set up a business. For example, you can structure your business as a sole proprietorship, partnership, or corporation.
Due to this, the tax return forms that you’ll complete will depend on the type of business you have. Below, you’ll find details about different structures’ filing process.
Sole proprietorships and One-Person Corporations
Sole proprietorships and one-person corporations will both fill out Form 1040, the personal tax return form. Business owners will fill out the profit or loss under Schedule C section “Profit or Loss from Small business” on Line 12.
Sole Proprietorship Tax Tips:
- Business-related meals and entertainment can be deducted.
- Remember the Section 179 deduction, which allows business owners to deduct depreciation in one year, rather than spanning it out over multiple years.
- Sole proprietorships can still write off certain employee benefits, such as healthcare costs.
Deductions are great. However, remember to keep personal expenses and business costs separate, or you could face some serious legal issues.
A multi-party corporation is considered a separate legal entity in the eyes of the IRS. The corporation, rather than the owners, will have to fill out Form 1120 and will have to pay taxes based on that.
Corporation Tax Tips:
- Have a complete grasp of corporate income including: cost of goods sold, gross receipts, interest, dividends rents, royalties, and capital gains.
- Remember deductions, including but not limited to salaries, rent payments, bad debts, pension payments, employee benefits, and advertising.
Know How Self-Employment Tax Works
Anyone who earns $400 or more in self-employed income must pay the self-employment tax. This tax covers the costs of Medicare and Social Security. The self-employment tax is broken down as such:
- Social Security– 12.4 percent with a maximum wage of $127,200. Beyond this wage you’re not required to pay.
- Medicare– 2.9 to 3.8 percent with no wage cap.
When calculating net earnings, the IRS allows you to deduct half of your self-employment tax. As a result, you will only pay self-employment taxes on 92.35 percent of your income.
Compile Financial Documents
Perhaps the most important step for filing business taxes isn’t filling out the forms themselves, but instead gathering the necessary documentation. There will be a lot of documents, such as financial statements and receipts.
When it comes to receipts, you should organize them ahead of time. Preferably, you should organize them throughout the year, by category. It may be too late to implement that system now, but start sorting through receipts as soon as possible.
Other Tax Document Considerations:
- Financial statements, including balance sheets, cash flow statements, and income statements.
- If you have employees, you’ll need payroll documentation.
- Businesses expenses, including business vehicle documentation (driving logs and operating expenses), office supplies, utilities, rent, advertising expenses, travel expenses, and utility bills.
- Asset additions and disposals (machinery, vehicles, etc.)
If you have a home office, you can use that as a deduction. The “simple” method for deducting home office space is to take the square feet of your office (up to 300 ft.) and multiply by $5 per foot. Be prepared to provide documentation.
Conclusion: With Taxes, Time Is Money
It’s important to start preparing your business taxes as soon as possible. By giving yourself more time, you’ll reduce stress and will be less likely to make mistakes. You’ll also have more time to find potential deductions and other tax savings.
Preparing taxes for a small business is far from easy. However, the more time you have and the more prepared you are, the less the burden will be.
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