Let’s be Honest, Taxes Aren’t THAT Bad
While this may be easy to hear when it’s coming from an accounting firm, your business taxes shouldn’t fill you with dread. In fact, like any aspect of your business, it can be managed, so you reduce your liability and lower your anxiety during tax time.
This blog will discuss notable changes for the 2020 tax season, give you a business tax preparation checklist, teach you how to prepare taxes for your accountant, and show you exactly how Rubino helps businesses like yours manage tax time.
Small Business Tax Preparation Checklist
Before we discuss the step-by-step process, here are some tips to help you stay organized:
- Remember that every financial decision may be material at tax time, which means you need proof of transactions.
- Sole proprietorships and Single Member LLC’s must keep business and personal expenses separate. This should be easy, but remember that the separation between what is acceptable as business and personal expenses is complicated for tax purposes.
- Separation of business and personal records is important not just for taxes, but also for applying for small business loans or building business credit, and liability purposes.
- Detailed notes are a great tool to stay organized as you log all travel, car, and office expenses as they occur.
- Many small businesses miss qualified deductions simply because they are missing source documents to prove they are qualified.
- An excellent way to stay organized is to digitize receipts using an app that scans and enters them into a spreadsheet.
- Modern accounting and tax software are designed with the small business in mind. This means they save time and effort by handling a lot of the data entry and financial records.
Pay as You Go
- The IRS expects your business to pay taxes as you earn income throughout the year. These payments can be made through estimated payments or withholding from your paycheck.
Hire a Professional and Ask Questions
- As a small business owner, you may be used to handling things yourself, which makes perfect sense if you are a fast learner and fill dozens of roles for your business. But business taxes are not simple, and when it comes to paying them and planning for them, hiring a CPA is a wise investment.
- Tax planning is a collection of strategies businesses and individuals can use to reduce their tax liability. Tax professionals understand these strategies and can help you make the right choices when it comes to your taxes.
Be a Professional and Get Answers Yourself
- While a tax professional is a great resource, it pays to be self-sufficient and informed about your business and your industry. Be active in your small business community to stay up to date with news and trends that impact your taxes.
- Learn about companies like yours at the Small Business Administration website (sba.gov). The IRS itself is also a great resource with webinars, videos, and articles that speak to your small business. Publication 334, Tax Guide for Small Business, is an important resource for small business owners. It explains all federal taxes that apply to your business, not just income.
Understand Your Deductions
- While useful at tax time, knowing what you can and can’t deduct from your taxes can guide your financial decisions throughout the year. Almost any business-related expense qualifies. Here are some qualified expenses that can be deducted:
- Employee Payments, including full-time, part-time, and contract workers
- Professional and legal expenses
- Advertising expenses, including expenses for web development, SEO, and travel
- Cost of goods sold
- Property: The IRS allows deductions for property used for business purposes. This includes the actual space and the tangible property your business uses. For example:
- Home Offices: Businesses can deduct a portion of rent/mortgage and some utilities as long as they measure the exact dimensions of their home office.
- Supplies: Notebooks, mechanical pencils, and similar consumables your business uses during the year can be deducted.
- Equipment: Anything that lasts longer than a year, like computers, can be deducted.
- Phone expenses: Communication is important to businesses, and you can deduct the percentage of your phone bill that is dedicated to business use.
- Mileage and vehicle expenses
- Startup costs
- Charitable contributions
Business Taxes: a Step-By-Step Process
Step 1: Know Your Forms and Your Filing Date
How and when you file your taxes is dependent on what form your business entity takes.
Sole Proprietor or Single-Member LLC: The most common form of business organization for tax purposes, sole proprietorships Schedule C Profit or Loss From Business will detail your business activities for the year, and it is attached to your Form 1040.
Partnerships or Multi-Member LLC: A Partnership distributes income and losses according to how the partnership is organized. Form 1065 reports income for the entity, while schedule K-1 divides the income among partners. Form 1065 has a tax filing deadline of March 15th.
Corporations: Form 1120 is the standard form for businesses organized as corporations. Income and losses are tied to the entity itself and not distributed to shareholders. Corporations must file by April 15th.
S Corporations: Corporations organized under Subchapter S of the Federal Tax Code approach income taxes a little differently. They are taxed like partnerships, they distribute income and losses among the shareholders. S Corps have a separate form to file, which must be done by March 15th.
Step 2: Get Everything Together
It’s impossible to file a complete, accurate return based on memory and guesswork, which means before you file, you must gather all financial information. Here is a list of what you will need:
Financial statements: If you use accounting software, it’s simple to create a balance sheet (assets, liabilities, and equity at a certain point in time) and income statement (income and expenses over a period of time).
Supporting documents: This is the reason you save receipts, bank statements, credit card statements, payroll records, etc. If in doubt, save it. You will also need tax records from the previous year and copies of estimated tax payments.
Taxpayer Identification Number: Your taxpayer identification number is how the IRS identifies you. Depending on your business structure and whether you pay employees, you may be able to use your Social Security Number. Most likely, you will have applied for and received a Federal Employer Identification Number (FEIN).
Step 3: Tax Deductions and Credits
While both lower your tax liability, there is an important difference between deductions and credits. A deduction reduces your taxable income, while credits reduce the amount of taxes you pay. Credits are more valuable than deductions, but if you log your expenses over the business year and they qualify as deductions, they can be a powerful tool to mitigate taxes. Remember that before you claim a credit or deduction, you must have a corresponding source document. Here are some deductions and credits that small businesses commonly claim:
Business tax credits:
- Small employer health insurance
- Disabled access
- Work opportunity
Common business deductions:
- Home office
- Business use of car
- Charitable contributions
- Bad debts
Step 4: Deduct Estimated Tax Payments
Self-employed individuals have to make estimated tax payments over the year. This system is similar to how an employer deducts taxes from an employee’s paycheck per pay period. Since business owners pay themselves, they pay estimated income taxes quarterly, and these payments are deducted from your total tax liability when you file.
Step 5: Determine the Need for a Filing Extension
It’s easy to put taxes off until the last minute, especially when you have a business to run and people depend on you. When you’re faced with a time crunch, the IRS allows an extension to give you a little more time to file. The alternative is throwing something together that may be inaccurate and incomplete, which is certain to go against you if you were audited.
Consider Professional Assistance
At Rubino, we take the guesswork and apprehension out of business taxes. We combine all five steps above, and as an added value, we work with you to:
- Help you understand the tax implications of your business decisions, so you make better-informed choices.
- Understand how all taxes affect your business, so nothing is a surprise.
- Determine a correct tax strategy that limits your tax liability and is flexible to change as your business changes.
A tax professional is an important asset to any business, regardless of size or industry. Here are some of the specific services that Rubino has to offer:
Corporate Tax Services: Corporate taxes can be complicated, even for businesses that are private and have very few shareholders. Organizing as a corporation does have many tax benefits, and Rubino can help you unlock them through a complete tax plan.
Individual Tax Services: While the business and personal taxes are separate matters, they are closely related in other ways. Rubino helps you through these complex issues, so your taxes, regardless of the source of your income, are correct and never a worry.
Are you prepared for tax season? If you find that now is the time to turn to a professional, reach out to Rubino. We understand the challenges that small businesses face, especially at tax time, and we work with you to develop a sound tax strategy and ensure you are filing and paying your taxes on time.
Sure, you can always file your own business tax returns, but with a dedicated tax professional, you never have to.