Like any other company, small businesses have to file taxes. If this is your case, and you’re doing it for the first time, the process can be confusing: there are several forms you must complete and submit to the IRS. But with the following guide, we want to save you an occasional headache. Here you’ll find the steps you have to follow to declare your taxes and a list of the forms you will have to fill in depending on your case.
Prepare Your Taxes in 4 Steps
If you are conveniently prepared to declare your taxes you will not only save time but also gather some useful information about your business that can make it more efficient. Follow these steps to survey the taxes season!
Step 1: Check your business information
Make sure your employees and contractors’ information is accurate and up to date. Double-check their names, addresses, social security numbers, status, etc. If you work with independent contractors, review their names, TIN number, and addresses.
Step 2: Organize your documents
Keep track of all your business documents for a more efficient tax-preparation process. This also allows you to keep up-to-date with your financial statements, control your expenses, and it’s useful in case of an IRS audit.
In addition, the Internal Revenue Service requires that you submit documents that support your income, deductions, and any credit you report on your tax return.
These are the main records you should keep:
- Deposits (sales in cash and credit)
- Checks canceled or other proof of payments or funds transferred
- Receipts of credit cards
- Bank statements
- Accounts to be paid and receivable
- Payroll records
- Previous tax returns
- Any other document that explains your income, deductions or credits as they appear on the tax return
Other documents that you may need during the tax season are:
- Contracts you have signed with clients, suppliers, employees, and contractors
- Legal documentation of your business structure
- Health insurance, safety controls, and any other similar documents
- Annual reports
Step 3: Be mindful of extensions, deductions, and reimbursements
According to the IRS, there are business administrative expenses that are deductible, as long as they are “ordinary and necessary”. The IRS defines “ordinary expense” as one that is common and accepted in your trade or business. A necessary expense, on the other hand, is one that is helpful and appropriate for your trade or business. Some examples include the purchase of equipment or vehicles, or travel expenses. Check this list to know exactly what expenses you can deduct in your taxes.
- Purchase of equipment. According to the IRS, business owners can deduct from their income a limited amount of the cost of the equipment or machinery they acquired during the year.
- Business expenses. Business expenses that can be deducted are advertising, employee benefit programs, telephone and utility costs, office supplies, employee salaries, affiliation fees to professional associations, subscriptions to commercial publications, and rental expenses.
- Travel expenses. You can deduct the ordinary and necessary expenses generated during business trips, such as transportation, meals, and lodging. In your records, you must state how much you spent on each of these activities, as well as the departure date of each trip, the number of days it lasted, the name of the city, and the reason for the trip or the benefits that you expect for your business.
- Vehicle expenses. If you use your car in business-related activities, the IRS allows you to deduct your expenses, or claim the standard rate per mile, which is an amount of money you can deduct for each mile driven while you are on business trips. For tax purposes, be sure to keep track of the miles, and parking and toll costs, as they can also be deducted.
Step 4: Seek professional counseling
Gathering all the required documents and making sure you’re following the right steps can be an overwhelming process. Don’t hesitate to look for a lawyer or accountant for advice. External counseling can be the fastest and most simple option to avoid an IRS audit and to save money.
Your tax return will depend on the type of legal structure of your company
The way your business is structured affects your financial performance. It also affects the way you report your taxes. These are the most common types of businesses, their main features, and their advantages and disadvantages when it comes to preparing taxes.
Small Businesses Tax Forms
The tax forms you need and the submission deadlines will depend on the legal entity your business belongs to. Legally speaking, businesses are divided into the following categories: sole proprietorships, partnerships, Limited Liability Companies (LLCs), and corporations.
Confused about the legal structure you should choose for your business? Find your answers here
These are the forms you must fill in according to the legal structure of your business:
Forms for Sole Proprietorships
These entities must submit the Schedule C (Profit or Loss From Business), and the Form 1040 (Individual Income Tax Report), to report the net profit and loss of the business. The Schedule SE (Self-Employment Tax) is also required.
Forms for Partnerships and Limited Liability Companies
These entities must submit the Form 1065 (Return of Partnership Income), where profits and losses of the company are reported to the IRS. Also, copies of the Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.), which is part of Form 1065, must be distributed to the members of the company.
Forms for Corporations
If your business is a corporation you have to submit the Form 1120 (Corporation Income Tax Return).
Deadlines to Submit your Tax Forms
Since small business owners submit their commercial taxes along with their individual taxes, the deadline for both is the same: April 15th. However, the return date can vary if your business reports the taxes based on the fiscal tax year or the calendar year.
It requires some effort, but we recommend you not to leave your taxes prepared for the last minute. If you work on your tax filing during the year, investing some time and resources, not only you will comply with the law and avoid an audit: you will also open the door to your business success.
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