Preparing Taxes for Your Small Business
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UPDATED: Feb 8, 2013
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Guess what time it is? Yes, it is tax season again!
Tax season is upon us and if you are a small business owner get ready to prepare your taxes.
Unlike the big mega-corporations who have legions of accountants, chances are most small business owners don’t have the same resources.
“Typically, if you have a business return, it is wise to have a tax professional at least help with one of your tax years. Basically, if you have a question about something involving your business, a tax professional can be an invaluable asset as they have likely encountered a similar situation at one point or another and it is always better to have your corner fully staffed when these questions arise,” said Neil J. Beeman, CPA Partner at Mann, Urrutia, Nelson CPA’s & Associates, LLP, in an interview with loans.org.
But if you are going to be handling the finances for your small business on your own, here’s what you need to remember when preparing taxes for your small business.
First, you need to harvest and gather up all of your business records. Nowadays this should be mostly electronic, but this can still be a time-consuming endeavor. Just get started and get it out the way.
The two main records you need are your business earnings and expenses. If you have this information in spreadsheets then half of your work is already done since spreadsheets are incredibly simple to navigate and use.
Certain tax accounting programs even let you directly upload a spreadsheet in order to prepare your taxes. That’s a key benefit if you are preparing taxes on your own.
The Proper Forms
Not all small businesses are the same. Some are sole proprietorships, others are S Corps, and still others are LLCs. Your tax filing process will change depending on what your business is.
For example, a small business that is an LLC with only one owner is permitted to file Schedule C attachments on the owner’s personal income tax return. However, incorporated small businesses may need the corporate tax return Form 1120.
This can be confusing and lead to several filing mistakes.
“Common mistakes include, failure to file required forms (payroll, 1099s, income tax forms) on their due dates or with their extensions, failure to pay reasonable wages for S corporation officers, failure to pay quarterly estimates to avoid penalties and interest, keeping incomplete books and records, and not having done the proper planning throughout the year so that the amount of tax due by April 15th comes as an unwanted, unnecessary surprise,” said Beeman.
Put Pen to Paper
Once you compile all of the necessary data, it’s time to start writing.
Fortunately, the IRS has created paperless filing. This should save you a lot of ink and white-out if you are an “old school” tax filer.
Schedule C forms are only two pages and actually list all the expenses that small business owners can claim.
Form 1120 includes much more detail that does not always apply to small businesses. However, a Form 1120 will be filed separately from personal income tax returns.
All forms that are applicable to you and your small business needs to be filed by their specified due dates.
Eye on the Clock
Not all of the forms are due on April 15th. Some are required earlier, while others later. The key is to prepare for each form’s due date ahead of time.
“Small businesses should remember this year to make sure they get all their 1099s sent to the recipients and the government before the January and February deadlines,” said Beeman.
A Schedule C must be filed as part of Form 1040 and is simply filed along with all the other tax returns on April 15. Form 1120 has to be filed on the 15th day of the third month after the end of the tax year. This is usually on March 15. This form cannot be sent along with a personal income tax return to the IRS.
“Filing an extension is the way to avoid most penalties and interest if you need additional time to file your returns,” said Beeman.
Deduct Like Crazy
Everyone loves deductions and one of the most common deductions is the home office.
Unfortunately, you can’t just deduct any room you happen to manage your business in. You actually need to have a dedicated home office, which you use solely to run your business. Form 8829 can be used for this deduction.
Speaking of a home office, you also need to deduct your office furniture. Another common deduction is office supplies.
For those businesses that are transportation-based, you can deduct your costs on gas to get to and from work. Of course, the government will require documentation of your mileage, so keep that handy.
Speaking of mileage, should your employees have to travel extensively for business, then the cost of lodging will be 100 percent deductible. Unfortunately, this doesn’t apply to eating, which can only receive a 50 percent deduction.
Businesses that have inventory can deduct the cost of the goods sold on their Schedule C forms.
Small business owners may have to pay self-employment taxes, but this tax comprises Social Security and Medicare taxes. Fifty percent of Social Security can be deducted on your 1040.
According to Beeman, business owners can also deduct the interest paid on commercial loans along with the possible associated deduction for any equipment that was purchased with the financing.
“Say a machine shop takes a loan to purchase a $250,000 new milling machine at 5 percent interest. They would be able to deduct the interest paid on that loan, and could potentially deduct up to the $250,000 of associated depreciation on the new machine. Obviously, the lower the interest rate, the better,” said Beeman.
He continued to explain that it is important for businesses to track their loan interest and deduct it.
Aside from deductions there are tax credits that small businesses should definitely look into taking advantage of.
“There are tax credits out there that the Federal and State government have put in place for hiring new employees, hiring veterans, employing people in certain areas of the state, and many other activities that can help reduce tax,” said Beeman.
Preparing your taxes isn’t exactly a fun time but you need to do it regardless. Being informed before proceeding is your best chance to avoid the headache of a mistake and the remorse of missing a tax credit or deduction. We’re only a few weeks from April so get started and don’t delay.