A No-Nonsense Guide to Small Business Tax Preparation
Technology makes the world go ’round. If you’re struggling to prepare your small business taxes by hand, you’re missing out on the opportunity to save hours, possibly days, on tax preparation each year.
The small business tax preparation process is very simple with automation in place. Take a look at this no-nonsense guide to understanding how to file your own small business taxes.
Small Business Tax Filing
There’s no one-size-fits-all approach to small business tax preparation. Small businesses include corporations with up to 500 employees.
These companies definitely won’t have an accounting strategy that mirrors that of a freelance photographer. But there are similarities when it comes to federal tax filing.
For starters, you need to first understand the filing requirements for your entity. Here are the most common business entities and their federal tax filing requirements.
Sole Proprietorship
Most freelancers and independent contractors are actually considered sole proprietors. These are people who operate a business in their personal names.
Your filing deadlines change each year, but they’ll match personal tax filing deadlines since a sole proprietor files business income on personal tax forms.
LLC
Limited liability corporations (LLC) are corporations run by at least one person. These entities are one step up from sole proprietorship when there’s only one owner.
There are two ways to file taxes as an LLC. The first is to add your business income to your personal tax return and file using the standard deadline for individuals.
You’ll use a Schedule C to report business income and expenses. The second method of filing your small business taxes is to elect to file as an S corporation.
Small businesses elect for a different filing status for a number of reasons. The most common reason is to avoid double taxation.
You’ll want to pay your personal income taxes separately from taxes owed by the business if you operate an LLC with major profits. Consult with a tax professional to decide what’s best for your organization based on your size and profit-loss statement.
Partnership
With a partnership, all partners are required to submit form 1065 with their tax returns. Your filing deadline with a partnership varies each year.
Be sure to look up your deadline for the upcoming year well in advance so that all partners can have necessary documentation well ahead of tax prep time.
S Corporation
Filing as an S corporation is easy if you’ve been compliant all year with payroll taxes. You’ll want these payroll tax statements on record to help you file your federal taxes faster.
Both C corporations and S corporations have different deadlines than individual taxpayers. S corporations file taxes on form 1120S.
C Corporation
Make sure you have all your ducks in a row if you’re filing as a C corporation. This filing option requires more administrative work than other filing types.
Depending on the size of your C corporation, you might need professional tax consultation even if you plan to use automation software to file your return. Corporations file taxes on form 1120.
Get Prepared for Small Business Tax Preparation
Small business tax preparation begins in the first month of your fiscal year. During this month, you’ll need to input monthly income and expenses into your business accounting software.
Keep up this trend for the remainder of the year to simplify your tax preparation later. If you get any special notices like refund checks from vendors or special tax incentives, keep the documentation for your records.
File your bank statements away in a folder every month so you can reference them at the end of the year. The same goes for any investments, benefits, or recurring membership statements you receive throughout the year.
You want your accounting software to capture every dollar that goes in and out of your organization throughout the year. Don’t pay vendors who don’t have a W-9 on file.
Whether the company is an individual or has 500 employees, you need proper documentation from them to avoid having your tax filing delayed at the end of the year. Keep W-9s from vendors, contractors, and employees in a folder so you can forward 1099 statements at the end of the year.
You should be using the most reliable w2 creator to automate mailings for employees at the end of the year.
Should You Automate Your Tax Preparation?
There are many options to automate your monthly accounting. You can integrate your business banking and credit card with your accounting software to make sure all transactions are captured.
But you’ll always need to be involved in the review process to make sure the information translates into the software correctly. Once you’re sure you have accurate accounting details, you can look for tax preparation software that allows you to import your data.
Importing accounting data is the holy grail of tax automation. But this doesn’t need you won’t need other financial records.
Here’s an overview of the business records you need to have on hand when filling out your tax forms.
Lease Agreements
Keep any agreements and statements you have for equipment leases. You want to reconcile any changes in interest rates or the cost of services.
There are ways you can depreciate certain types of equipment even if you don’t own it outright. Consult with a tax professional to decide what makes sense for your organization.
Loan Statements
You’ll need physical copies of any business loan statements on hand. There might be stipulations on deductions you can take from government-issued loans vs private loans.
Bank Statements
Bank statements should be within close range to help you quickly reconcile your income and expenses. You’ll also need your ending bank balance for the fiscal year.
1099s
Expect a 1099 statement from all of your business clients. This includes any special tax circumstances like foreign income.
Use the amounts in the boxes provided to complete your small business tax return.
Investment Statements
If your business invests money in other enterprises, make sure you have a statement to support the amount you’ve spent. You’ll need special forms if you’ve sold any assets for a profit during the tax year.
Legal Settlement Information
Lawsuits can yield a settlement that is usually taxable by the IRS. Make sure you have all settlement documents on hand in case their is a portion you can exclude from taxation.
Most settlements that include loss of business income, however, are taxable. Keep these records whether you won or lost the lawsuit.
Choose a Tax Form
Small business tax preparation is based on the form you need to file your return. Most small business owners either file an 1120 or Schedule C. The Schedule C form is an addendum to a personal tax return.
Corporations need to use form 1120 which is separate from your personal taxes. Form 1120 isn’t due at the same time you file your personal taxes either.
It’s not uncommon for business owners to have two separate tax preparers for business and personal taxes. For more information and tips, visit our blog for updates.
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