Small Business Tax Preparation
To ready yourself and your workplace for business tax season, you’ll need last year’s tax returns as well as a detailed tax checklist of business expenses for the tax year you’re preparing. If your home doubles as your office, you’ll want to gather any expenses related to that space as well. It’s also helpful to know the vital deadlines — when to file without penalty, when any payments may be due, and when your accountant will need your financial information in order to successfully complete your return are among the many demands of business tax season.
All of that may sound easy, but often becomes more time-consuming than some business owners realize. Below are steps that can help you, and your small business, successfully prepare for tax season.
How to prepare taxes for small business
Start this year with last year’s information. Review your previous year’s return, particularly your federal Schedule C, which is where you’ll enter most of the required information about your company. Even if your business changed significantly, last year’s return may remind you of the business expenses you typically report, and whether you claimed expenses related to a home office.
You may also want to review any changes to the tax code. For example, laws pertaining to COVID-19 relief have added more complexity for the 2022 tax year and reviewing the CARES Act and its many provisions should be considered for businesses impacted by COVID-19.
Important dates for the small business tax year
April 15 is the traditional tax deadline that most people know, which is true of sole proprietors, LLCs and corporations with a Dec. 31 fiscal year-end, but check if the IRS has extended the filing deadline. Other types of businesses have different deadlines. If you have a partnership or multiple-member LLC taxed as a partnership, March 15 is usually the due date.
If you need more time, you can file for an extension of up to six months for your business tax return. The extended return due date is Oct. 15, for companies with a Dec. 31 fiscal year-end.
Note that you’ll still need to send the IRS and your state your best estimate of any owed taxes by your regular tax deadline. Years when the dates fall on a holiday or weekend, the due date typically falls on the next business day.
Collecting key information: Make a tax checklist
Whether or not you’ve hired an accountant, finding and organizing all of your tax paperwork can take hours if not days. Consider setting aside a short time each day to work on your company’s taxes so you don’t feel overwhelmed.
You may also want to create a special electronic folder or paper-based holding place for tax-related documents (you can also use this organizational process over the next year to make your tax preparation in the future easier). A digital business accounting program may prove useful. Having a business credit card can also be quite helpful, as you can review your credit card statements for business expenses all in one place. Download them from your online account if you didn’t keep paper copies.
Small business tax deductions and preparation checklist
Your tax checklist could include:
- Office supplies
- Business equipment
- Work travel or mileage not reimbursed
- Payroll expenses, if you have employees
- Proof of retirement plan contributions
Also note any taxes you’ve already paid, such as estimated federal or state taxes.
You might also need client 1099 forms, which typically come in the mail shortly after the previous year’s end. Compare these to client payments (accounts receivables) and if you see any mistakes, you can request a corrected form from the issuer. You can also use 1099s to make sure you haven’t forgotten to record any client payments in your business files.
Gather bank and credit union information. You’ll need to include on your taxes any interest or dividends you earned on business financial accounts. Many financial institutions now post interest statements, known as either 1099-INT or 1099-DIV forms, online.
How much should a small business set aside for taxes?
Tax obligations vary from state to state and business to business, but below is one way you can calculate your estimated taxes:
- Estimate your taxable income for the year
- Calculate what you’ll owe in self-employment and income tax
- Divide that into quarterly tax payments
From there you can submit estimated quarterly tax payments to the IRS. Alternatively, you may want to consider hiring a tax pro to help you determine the more precise amount you’ll owe in taxes.
Filing small business taxes if you have a home office
Many entrepreneurs now work from home. If you have a dedicated home office, you have the option of taking a simplified or regular deduction. The simplified method allows you to multiply your office square footage by a set tax rate. The regular method allows you to deduct portions of your overall home-related expenses as business costs.
If you’re entitled to deduct expenses related to a home office, you’ll need to double check the size of your office, and calculate the percentage of your home’s square footage the office occupies. You can then deduct that percentage of overall home expenses that serve that home office, such as utilities, repairs, homeowners or renter’s insurance, and more. The IRS Publication 587, “Business Use of Your Home” includes all the details. If you work with a tax professional, they can help you determine these costs.
Finishing up: How to do small business tax return
If you work with a tax pro, they’ll take your information and finish your return on your behalf. Typically, you’ll just review and sign the tax forms.
If you’re doing your own small business taxes, set aside some uninterrupted time to really focus on the task. Answering all the questions on a software program or filling out the paper forms always takes time, and you may do a more thorough and accurate job if you don’t try to squeeze tax work in between other work tasks. Using a tax checklist to review your work can also help you avoid errors.
Of course, you can still fill out paper forms if you’re a fan of analog methods. Most local libraries provide free copies of the most common tax forms. If you prefer to file your returns digitally, the IRS offers e-filing options on its website.
Create a small business tax preparation checklist before the next tax year
Once you finish your business taxes, it’s tempting to avoid thinking about taxes again until next year. However, you could also use the beginning of the year as a chance to improve, and set yourself up for an easier process next year.
First, ask yourself if you learned anything from doing this year’s taxes that could help you be better prepared for next year’s tax season. If you have questions about accounting software, early in the new year may be the best time to research programs. Could a business mileage app on your phone help? If you and any employees download such an app at the start of the year, you’ll have a full electronic record by next year’s filling.
Taxes won’t go away. But with planning and preparation, you may be able to make the whole process a little easier every year with a tax checklist.
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