As a newbie small business owner filing taxes, you may experience a sense of apprehension towards the process. You may find yourself seeking clarity on pertinent issues such as the appropriate forms to use, the preparation of business financial state for tax season, eligible deductions, and the possibility of filing an extension. It is important to note that these concerns are not uncommon. This guide provides comprehensive answers to these frequently asked questions and offers valuable insights on how to effectively file small business taxes.
Records Needed for Tax Filing
Maintaining comprehensive records of business expenses incurred during the year can effectively reduce your taxable income. To accurately report your business income and qualified expenses, it is imperative to consolidate all relevant company records.
This entails collecting supporting documents pertaining to payroll, sales, purchases, and other eligible business expenses. When preparing your tax returns, it is recommended to gather small business documents such as invoices, paid and outstanding bulls, canceled checks, deposit slips, sales slips, cash register tapes, credit card statements, bank account statements, employment tax records, and year-end payroll reports.
Know What IRS Forms You Need (Depends on Business Structure)
For sole proprietors, the appropriate form to use when filing taxes is Schedule C, as required by the IRS. This form must be attached to the individual’s personal tax return.
Partnerships, on the other hand, must file their business tax returns using Form 1065, and both the partners and the partnership must report their business activity to the IRS. Partnerships must also send out Schedule K-1, Partner’s Share of Income, Tax Credits, and Deductions to their partners, who will use this form to complete their individual tax returns.
For corporations, the appropriate tax return form is Form 1120, or Form 1120S if the corporation is structured as an S-Corporation.
Limited liability companies (LLCs) have a variety of forms to choose from, depending on how they elect to be taxed. Multi-member LLCs are typically treated as partnerships by default, while single-member LLCs are disregarded for federal purposes and require the owner to file a Schedule C to report business income and losses. If an LLC wishes to be taxed as a C Corporation, they must use Form 1120, while electing to be treated as an S Corporation requires the timely submission of Form 2553, Election by a Small Business Corporation.
Know Your Tax Deadlines
In certain tax years, the deadline for submitting your personal income tax return or small business tax return may coincide with a holiday or a weekend. In such instances, the revised tax deadline is the subsequent business day. As a business proprietor, maintaining a systematic approach is crucial, as you are responsible for managing various aspects such as invoices, inventory, website, payroll, employees, and other related matters. Therefore, it is imperative to remain organized with respect to the deadline for your business taxes.
Upcoming Deadlines:
September 15, 2023 – 3rd quarter 2023 estimated tax payment due and Extension Deadlines for SCorp and Partnership
October 16, 2023 – Final extended tax deadline to file personal or corporate returns if requested by filing correct forms
January 15, 2024 – 4th quarter 2023 estimated tax payment due
Know Tax Deductible Business Expenses
Small enterprises are permitted to claim “ordinary and necessary” deductions, which can effectively decrease their taxable income. This reduction in taxable income can potentially result in a lower tax liability for both the business and its owner during the tax year.
Deductions Include:
Equipment – Business owners can take advantage of the expensing allowance under IRS Code Section 179, which allows for the full deduction of a limited amount of new business equipment costs from taxable income in a single year, rather than depreciating the cost over several years.
Business – There are several common business expenses that are eligible for deduction, including advertising expenses, employee benefit programs, insurance, legal and professional services, telephone and utilities costs, rent, office supplies, employee wages, membership dues to professional associations, and business publication subscriptions.
Auto – If a car is used for business purposes, the IRS allows for either the deduction of actual business-related expenses or the standard mileage rate, which is a specified amount of money that can be deducted for each business mile driven. To calculate the deduction, multiply the business miles by the standard mileage rate for the year. It is important to keep a log of business miles, as well as the costs of business-related parking fees and tolls, to substantiate these expenses.
Meal and Entertainment – To qualify for a deduction, business entertainment must be either directly related to the business or associated with it. Meals and entertainment must be “ordinary and necessary” and not lavish or extravagant.
Travel – Ordinary and necessary expenses incurred while traveling on business are deductible. Records should show the amount of each expense for items such as transportation, meals, and lodging. It is important to record the date of departure and return for each trip, the number of days spent on business, the name of the city, and the business reason for the travel or the business benefits expected to be achieved.
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