As the year comes to a close, most people are thinking about holiday shopping, parties, and vacations. As a small business owner, you are probably thinking about your 2017 tax return. Filing taxes, especially as a small business, can be confusing, intimidating, and it may make you want to pull your hair out more than once. If you go slow and make sure to gather everything you need, it won’t be so bad- I promise. Here is a list of 5 simple steps for filing a small business tax return.
1. Determine how to file based on the type of your business– The first step in preparing for tax season as a small business is to think about what type of small business you have. This will affect how you file your taxes. Are you a sole proprietorship, an LLC, a general partnership, an S corporation, or a C corporation? This should have already been established when setting up your business, but it comes into play again now. Different types of business have different tax return requirements, so it is important to know what kind of business you are in order to know what will be required.
2. Collect ALL of your records- You have probably heard that you would have to gather a lot of paperwork for taxes, and it’s the truth. Your paperwork may consist of actual papers, or the documents may be digital. Either way, make sure you have them.
When it comes to what kind of paperwork you should be collecting, the IRS states, “The business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions.”
Some examples of records include payroll, sales slips, canceled checks, deposit slips, receipts, invoices, and cash register tapes. Don’t forget to keep track of expenses from travel, any purchases, and records for things such as machinery or furniture that you own and are used in your business. Lastly, employment records are necessary as well. To make life easier for yourself, do your best to keep track of these things throughout the year instead of scrambling during tax season.
3. Find what forms you need
It’s an unfortunate reality, but there will be some filling out of forms when preparing your taxes. As mentioned earlier, the type of small business you have will affect which forms to fill out. Each state will have different forms and requirements, but here is a basic overview of a few of the forms for federal income taxes:
-Form 1120 U.S. Corporation Income Tax Return– Form 1120 is for C corporations filing tax returns. C corporations are businesses where the owners do not pay the taxes themselves on individual returns.
-Form 1120 S U.S. Income Tax Return – This form is used for S Corporation businesses. Unlike C Corporations, S Corporation shareholders pay income tax on their individual income tax returns. Because of this, shareholders must also each fill out a Schedule K-1 Form as well.
-Form 1065 U.S. Return of Partnership Income– If your small business is set up as a partnership, you will need to prepare one of these forms. This form is only for informational purposes because partnerships do not pay tax on income. If you are part of a partnership, each partner will also need to fill out a Schedule K-1 Form, which goes into detail about each individual partner’s earnings, dividends, and losses.
-Form 1099 MISC-This is a form that is prepared and given to any independent contractors you may have hired, and it is also sent to the IRS as part of your tax return.
You will also need to fill out various Employer forms as well, such as Form W-2 Wage and Tax Statement.
4. Make sure you are getting the deductions you deserve
If any part of doing your tax returns could be considered fun, deductions would be it.
Drew Hendricks of Forbes points out, “Taxes aren’t just about the government getting its due. In fact, many tax rules are exemptions and allow for deductions – they are essentially ways for the government to try and get you and your business to spend money the way the government wants.”
You’ve worked hard this year, and running a small business is a costly venture. Make the most of your tax deductions, but also be aware of what is an acceptable deduction and what isn’t. The IRS provides some basic guidelines for this. The business expense being deducted must be “ordinary and necessary.” Some common ones for a small business tax return include: supplies, vehicle expenses, business travel, contract labor, employee wages, insurance, employee benefit programs, and retirement plans for employees. Be careful to not mix up personal expenses with business expenses and be aware of what business costs are 100% deductible versus a lesser percentage.
5. Double check your work with the help of a CPA
Filing a tax return as an individual person can be confusing, and filing as a small business owner is much, much harder. It is important to be aware of the steps involved with filing a small business tax return, and what the requirements are. However, it is recommended that you enlist the help of a licensed CPA to make sure that everything is being filled out completely and correctly, especially if this is your first time filing as a small business. A CPA can help you navigate all the forms, find deductions, and inform you about what records and paperwork are necessary to collect.
Do you have questions? Or, are you on the double check step? At Lucid Books we are here to help with your tax and accounting needs. Please do not hesitate to contact us for more information.