Posted by Deepshikha Shukla
February 10, 2022 | 5-minute read (901 words)
As a business owner, it can be daunting to prepare taxes when you’re still expected to perform a wide range of other tasks to keep the venture afloat. Whether you own a small business that has been operational for years or just launched a startup, you need to have a few things ready before filing taxes.
We’ve created a comprehensive checklist to help you be ready to file your taxes.
1. Choose the right structure for your business
Your business structure will dictate your tax payments, your personal liability, your ability to raise capital and more. Common business structures are sole proprietorships, limited liability companies or partnerships, S Corps, B Corps and C Corps.
First, double-check that your business is structured correctly. Then, ensure that you file the corresponding tax form based on your business structure.
As a company and its revenues grow, its structure may also change. It’s best to discuss with your CFO or CPA every couple of years that your business structure is still the best choice, in order to stay ahead of tax planning.
2. Understand your tax filing deadline
Apart from a good understanding of tax terminology, you should also know your tax filing deadline to avoid late penalties. The penalty for filing your tax return late is 5% of the taxes that you owe for every month. If you forget to file your tax return over 60 days following their due date, the minimum penalty that you will be assessed is either $210 or 100% of the taxes that you owe. However, it's also possible to request a tax-filing extension if you're unable to file on time.
3. Keep your personal and financial records ready
To correctly fill out your tax forms, you must provide the right personal information, which may include:
• Social Security numbers for you, your spouse and dependent(s) if applicable.
• Employer identification number.
• Any addresses pertaining to your business.
• Any business agreement showing ownership percentage and acquisition date.
• A copy of the previous year's business tax return to access your adjusted gross income.
Financial records to have on hand:
• Profit and loss statements showing how much income your business lost or generated during the year, after subtracting your expenses and the cost of goods from overall revenue for the year.
• Balance sheet representing the financial position of the company including the owner's equity as well as assets and liabilities.
• Bank and credit card monthly statements; receipts and invoices to orders and credit memos.
• Payroll documents including information about wages, deductions and unemployment compensation for each payment period.
• Partnership agreements with the terms and conditions of the partnership.
• Keep all receipts related to your business expenses or income on hand for at least six years following the date of the return.
You must maintain up-to-date and accurate personal and financial records even if your firm is exempted from paying income tax to keep its tax-exempt status.
4. Look for tax deductions and credits
Federal tax law allows taxpayers to deduct several different personal expenses from their taxable income each year. While calculating taxable income for your business, it's possible to deduct the cost of some properties and equipment that are necessary for making income, for example. In such situations it is important to determine the depreciation schedules of these assets for tax purposes.
Tax deductions refer to a reduction in your tax liability by lowering your taxable income, that is the amount of income subject to tax. Some tax deductions for small businesses include:
• Charitable contributions that your company has made.
• Travel expenses.
• Home office deduction, if applicable.
• Depreciation deductions of an asset over a number of years.
• Costs incurred to use a vehicle for business, such as fuel, repairs, maintenance, licenses, registration fees, depreciation and insurance as well as auto loan interest.
A tax credit directly trims down the amount of tax you owe. There are numerous tax credits that you may be eligible claim, including the:
• Research and Development (R&D) Tax Credit
• Work Opportunity Tax Credit
• General business tax credit
• Family and medical leave credit
• Small business health care tax credit
• Disabled access credit
• Alternative motor vehicle credit
Before arriving at the final taxable income amount, you’ll need to calculate the adjusted gross income for personal income tax returns by using deductions and credits for which your business is eligible.
5. Select an accounting method
Accrual accounting is one of two standard accounting methods used by businesses, the other of which is cash accounting. Accrual accounting evaluates an organization’s position and performance by identifying economic events regardless of when transactions occur. Cash accounting only records transactions when payment is made or received. You will also have to choose whether to operate on a calendar year or fiscal year. “Typically flow through entities will operate on a calendar year,” CPA Rich Middleton advises.
6. Set up a retirement plan
One of the best ways for small business owners to lower their taxes is to set up a retirement plan. The three most common retirement plans for small business owners are SEP IRA, Solo 401(k) and defined-benefit pension plan.
Lastly: Before filing, it's recommended that you check in with your accountant, bookkeeper or CFO. They can ensure you haven’t missed any deductions or credits. They can address any tax questions and will be able to guide you through the process to ensure compliance.