Fundamentals of Filing Business Taxes

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Staff Writer - Angela
May 22, 2018
Fundamentals of Filing Business Taxes

As tax season approaches, many entrepreneurs, especially new business owners, become stressed and anxious over the filing process. Business owners get overwhelmed by the idea of digging through endless piles of paperwork trying to find important records or documents. However, the right information, tools, and organization techniques could turn filing business taxes into a smooth and effortless affair. Understanding what you are doing will not only spare you unnecessary stress but will also prevent any tax problems down the line.

How and when to file your federal income taxes will depend on the structure of your business. Sole proprietorships, partnerships, limited liability companies (LLCs), and corporations must file different tax return forms. You might need to file additional forms if you have employees or run a particular type of business. Before we dive into the details about which forms you need to file and when, you have to figure out who will prepare your taxes.

Should You File Yourself or Find an Accountant?

The first step is to decide whether you will file taxes yourself or hire a professional to do it for you. If you are quite organized and willing to spend some time familiarizing yourself with tax regulations, you should have no problem doing the taxes yourself.

However, if this is your first time filing business taxes or you find yourself overwhelmed by the complexity of tax rules, it’s best to work with a tax accountant. He or she can guide you through the process, explain any intricacies, and show you some tips and tricks on how to save money on taxes. You will have peace of mind knowing your business is in good hands in case of any complications. Although the fee for an experienced accountant’s expertise might be substantial, such fees are tax-deductible.

To find a trustworthy accountant, ask for referrals from your fellow business owners. Make sure to verify credentials of your accountant. Ideally, your accountant will be a CPA (certified public accountant) and an expert in business taxes. Don’t settle for the first accountant you meet. Interview several individuals to find a reliable professional.

Filing Your Business Taxes Electronically

If you decide to file taxes yourself, consider utilizing one of the many business tax software programs. They are not only convenient but also helpful in guiding you to which forms you need to fill out and what tax strategies might help your business.

The IRS allows you to file many of your business taxes and forms online. On its website, the IRS provides a list of companies offering online tax preparation services for businesses. Among them are TaxAct, Drake Software, Corptax, Global Tax Solutions, and others.

Gather Your Records

Whether you are doing your taxes yourself or working with a professional, your first step is to collect all the necessary documents and business records. Ideally, you will use a spreadsheet or a computer program to track all your transactions. This will make your income and deduction calculations much easier and faster, especially if you opt for filing your business taxes online. Tax software programs typically allow you to import information from programs like QuickBooks or Quicken directly into your tax return, sparing you from the long and monotonous work of entering numbers manually.

Identify What You Can Deduct

As a small business owner, you can deduct various expenses related to your business. You just need to make sure they fit the IRS’s “ordinary and necessary” criteria. The expenses are ordinary if they are common in your field of business. The expenses are necessary if they are appropriate and help your business. You will have to report all tax-deductible expenses on your income tax form. Below are various categories of business expenses that could qualify for a deduction.

  • Equipment purchases: Every year, you can deduct a certain amount of the cost of new business equipment.
  • Business expenses: You may deduct some common business expenses, such as advertising, employee benefit programs, insurance, legal and professional services, telephone and utility costs, rent, office supplies, employee wages, membership dues to professional associations, and business publication subscriptions.
  • Auto expenses: If you use your car for business, you can deduct your actual expenses or calculate the deduction with the standard mileage rate method (multiply the number of miles you drove for business by the standard mileage rate). Ideally, you will have a log of your yearly business miles. Also, make sure to keep a record of the costs of parking fees and tolls associated with your business trips. Though the second method is easier, the actual cost method might give you a larger deduction. If your business qualifies for either method, you could calculate your deductions both ways and see which one gives you a larger deduction.
  • Travel expenses: Keep a record of all your business travel costs, along with transportation, meal, and lodging expenses. Note the exact dates of travel, number of days spent doing business, the name of the city, and the reason for travel. Don’t forget about your expenses for cleaning, laundry, telephone, fax, and modem usage.
  • Meal and entertainment expenses: You may deduct up to 50% of meal and entertainment expenses. This category of expenses must be directly related or associated with your business in order to be deductible. It must be clear that these expenses are ordinary and necessary, not lavish or extravagant.

You should be able to prove that the entertainment was organized solely for business purpose and you expected some real business benefit; that, during the entertainment, you were pursuing business matters; and that doing business was your main goal. The entertainment must have a clear business purpose and take place right before or after a significant business affair. Make sure to keep a detailed record of any entertainment or meals; collect all receipts that are over $75; note a reason for each expense, amounts spent, dates, and location; describe the type of entertainment; and list names, titles, and occupations of the people present during entertainment.

A Complete Checklist of Things You Will Need for Filing Business Taxes

To be sure you have everything you need, go over the following list and gather all the applicable items from each category:

Income:

  • Sales receipts and records
  • Returns and allowances
  • Business checking/savings account interest
  • Any other income

Cost of Goods Sold:

  • An inventory list with inventory’s beginning and ending total dollar amount
  • Inventory purchases
  • Items removed for personal use
  • Materials and supplies

Expenses:

  • Advertising
  • Phone, computer, and internet expenses
  • Transportation and travel expenses (mileage log, log or receipts for public transportation, parking, tolls, airfare, hotels, meals, taxi, tips, internet connection, etc.)
  • Contractors’ commissions
  • Depreciation (cost and first date of assets’ use, records about the personal use of assets, sale price and date assets were sold)
  • Business insurance (casualty loss insurance, errors, omissions, etc.)
  • Interest expense (mortgage interest on buildings owned by the business, business loan interest, investment expense and interest)
  • Professional fees (lawyers, accountants, and consultants)
  • Office supplies (pens, paper, staples, and consumables)
  • Rent expense (office space rent, business-use vehicle lease expense)
  • Home office (square footage of the office space and home, hours of use, mortgage interest or rent paid, homeowner’s or renter’s insurance, utilities, cost of the home, separate improvements, and the first date of business use)
  • Wages paid to employees (Form W-2 and W-3, federal and state payroll returns, employee benefit expenses)
  • Other expenses (repairs, maintenance of office facility, estimated tax payments made, health insurance, premiums paid to cover the sole proprietor and family, premiums paid on behalf of partners and S-corporation shareholders, information on spouse’s employer-provided insurance)

Overview of the Standard Business Taxes

Income Tax: Except for partnerships, all businesses must file an annual income tax return. Along with your return, you will have to submit Form 1040, Form 1120, or Form 1120-S, where you will report your income and expenses. You have to pay your income tax on a pay-as-you-go basis and submit your estimated tax payments four times a year. Each time, you will have to attach Form 1040-ES for sole proprietorships, partnerships, and S-corporations or Form 1120-W for regular corporations.

Self-Employment Tax: Self-employed individuals must pay a self-employment tax covering Social Security and Medicare taxes and file Form 1040.

Employment Tax: You are responsible for paying an employment tax if you have employees. It includes Social Security, Medicare, federal income tax withholding, and federal unemployment tax. The employment tax is filed with Form 940, 941, 944, and 945.

Excise Tax: This tax is specific to certain types of businesses. You must check with the IRS if your business falls into this category.

Appropriate Tax Forms for Different Business Structures

You must always file your business taxes with the IRS, but which form you need to file will depend on how you structured your business. All businesses must provide everyone working for them ― whether an employee or independent contractor ― with appropriate tax documents. Employees get Form W-2 (Wages and Tax Statement), and independent contractors need Form 1099-Misc (Miscellaneous Income).

Sole proprietorships: Sole proprietors can report all business income and expenses on a Schedule C attachment to their personal income tax return (Form 1040, U.S. Individual Income Tax Return), along with Schedule SE (Self-Employment Tax). Schedule C is a basic form with only two pages where you total all your expenses. Then, you subtract your expenses from the business income to get a number for net profit or loss. Finally, you must copy this number onto your personal income tax form. Make sure to submit estimated tax payments quarterly if you think you will owe $1,000 or more in federal taxes.

Partnerships and LLCs: These two business entities must file Form 1065 (U.S. Return of Partnership Income). Make sure all partners or LLC members have their copies of Schedule K-1 (Partner’s Share of Income, Credits, Deductions) of Form 1065 by the filing date.

Corporations: Regular corporations must file Form 1120 (U.S. Corporation Income Tax Return). This form calculates your income the same way as Form 1040 but is a lot more elaborate and is filed separately from your personal income tax return.

S-Corporations: S-corporations must file Form 1120-S (U.S. Income Tax Return for an S-Corporation). All shareholders must receive their copies of Schedule K-1 of this form before the filing date.

Filing Due Dates for Different Business Entities

Filing deadlines for different types of businesses vary. Following are the standard due dates for all businesses. Make sure to check with the IRS at the beginning of every year, as these dates could change from time to time.

Sole Proprietorships: Because sole proprietors file Schedule C of Form 1040, their filing date is the same as for individual income tax filing, which is April 15 if you follow a calendar year. For fiscal-year taxpayers, the due date is the 15th day of the fourth month after the end of their tax year.

Partnerships and LLCs: The due date is the 15th day of the third month after the end of the tax year for fiscal-year taxpayers. If a company goes by a calendar year, the due date is March 15.

Corporation: Regular corporations have to file by March 15 if they are calendar-year taxpayers and by the 15th of the fourth month after the end of the tax year if they are fiscal-year taxpayers.

S-Corporations: The filing date is March 15 for calendar-year taxpayers and the 15th day of the third month after the end of the tax year for fiscal-year taxpayers.

What to Do if You Can’t File on Time

If you find yourself falling behind and are not able to meet the deadline for filing your business taxes, submit an extension request with the IRS to avoid hefty penalties and interest charges for late payment. If you owe more than you can pay, sometimes you can qualify for an installment plan. Most importantly, try to be proactive about the situation, and don’t wait until you are already in trouble with the IRS.

Hopefully, this overview on how to file your business taxes will give you some relief and fundamental understanding of the filing process. If you’re already in debt with the IRS, contact Solvable for your free consultation with one of our debt specialists and learn about your options to help get out of debt.

 

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