As a small business owner, filing business taxes for the first time can be nerve-racking. Even if you’ve been in business for several years, changes in federal tax laws, state tax laws, and small business tax deductions — like the small business deduction enacted when Congress changed the tax code by passing the GOP’s Tax Cuts and Jobs Act — can really throw you through a loop.
This is especially true if you waited to pay taxes until the last minute and now find yourself scrambling to pull together all of your receipts, calculate how much you have to make to file taxes, summarize profit and loss figures and business income, remember all of your financial activities over the past year, or merely determine which forms to use.
Give the job to an accountant
If you don’t have a solid understanding of small business finances and taxes, or what small business tax deductions are possible, it may be in your best interest to employ a tax professional. In only a few hours, they can help you sort through and summarize all of the information needed to pay your taxes, freeing you up to focus on the day-to-day operation of your business.
Keep in mind that it’s a lot less expensive if you plan ahead and compile as much information as possible prior to scheduling an appointment with your accountant. Every small business is different, so the information needed will differ, but will generally include: gross income, client invoices, records of goods sold, salaries, sales records, last year’s tax return (if applicable), receipts for office supplies, etc.
If you would rather do your own taxes and not take advantage of a CPA, you could take tax preparation classes or research online sources to help you make sense of the tax forms needed to file your business taxes accurately.
Online resources will help define terms like earned income, premium tax credits, refundable credit, filing status, earned income tax credit, and show you how an IRA, health insurance, and child tax credit can affect your return.
Let’s go through the top five documents that you and your accountant will need to complete your tax return.
1. Financial statement
For tax purposes, the income statement, or profit and loss statement, is particularly important to your accountant, but he or she will likely request a summary of your company’s assets and expenses as well.
The cash flow statement summarizes how well your company manages its cash position, and how well the company generates cash to pay its obligations or fund its expenses. The balance sheet shows a company’s assets and liabilities, as well as the owner’s equity at any specific period of time. The income statement focuses on your company’s revenues and expenses over a particular period.
Because your company’s financial statement provides you with a formal record of all financial activities, it’s a necessity during tax time to ensure the accuracy of your taxes.
2. Capital-asset activity
A capital asset is an asset that benefits your business for more than one year. It’s typical for a business to have many assets.
When an asset or assets are sold, they must be classified as either a capital asset, depreciable property, real property used by the business, or item for sale to customers, such as inventory. The sale of a capital asset results in capital gain or loss.
During the year, if you traded, bought, or sold any tangible or intangible capital assets owned by your business, you’ll need to account for these transactions on your tax return.
Familiar types of tangible capital assets include land, equipment, buildings, or vehicles. Whereas intangible assets may include copyrights, patents, and trademarks.
If you use accounting software, be sure to print out any capital-asset activity so your accountant has the details necessary to file an accurate tax return.
For example, if an asset’s selling price is higher than the companies’ purchase price of that asset (plus any capital improvements and cost of sale), the result is a capital gain, whereas if the selling price is lower, the result is a capital loss. Either way, capital-asset activity affects your companies bottom line.
3. Vehicle use
There might be times when you must use your personal vehicle for business purposes. When you do, you can claim a portion of your vehicle’s operating expenses as a tax deduction.
The IRS lets you calculate the deductible portion of your car expenses in one of two ways:
- When using the actual vehicle expenses method, you start by adding up all of your vehicle operating expenses, such as interest on your loan (or cost to lease a vehicle), gas, repairs and maintenance, insurance, etc. Next, divide any miles you drive solely for business by the total miles driven. Then, apply that percentage to your operating costs. This becomes your allowable deduction.
- The simplified method lets you apply the current IRS-mandated mileage rate to the total miles driven for business in the year. For tax year 2019, the standard mileage deduction is 58 cents per mile for business use.
For either formula, you must keep track of all mileage used for business in a vehicle log. This can be as easy as jotting down miles, dates, and descriptions into a notebook, or you can use software to easily keep track of your mileage. Whatever method you prefer, be sure to bring a copy with you when visiting your accountant at tax time.
4. Summary of home-office expenses
If you use a portion of your home exclusively for business or if you regularly meet with clients or customers in your home office, you can generally claim home-office expenses.
These expenses include a percentage of your home insurance, mortgage interest (or rent), utilities, repairs, and maintenance. But, there are two requirements for your home to qualify as a deduction: it must be the principal place of your business, and you must use the section of your home that you plan to deduct exclusively for that business.
The most exact way to calculate your home-office deduction is to divide the square footage of your office space by the livable square footage of your home. Using this calculation, multiply your total home expenses by the home-office percentage.
Some accountants will ask for your original receipts, including indirect and direct expenses, while others will only want a summary of expenses. Check with your accountant to see which he or she prefers, and compile your documents prior to scheduling a meeting.
You can also use a simplified method to claim your home-office deduction. The simplified method allows you a standard deduction of $5 per square foot of the portion of your home used for business.
5. Form 1098 for mortgage interest and property taxes
If you claim a part of your primary or second home for business, you must decide which part is used for business and which is used as your personal living space. Think of it this way, if your home office space accounts for 15% of your home, you can claim the usual deductions for 85% of your home mortgage interest and claim the remaining 15% as a business expense.
In this situation, it’s likely you received an IRS Form 1098 from your mortgage company at the end of the year that summarizes your mortgage-interest and property-tax payments throughout the year.
Your accountant may ask you for this form to claim the mortgage-interest deduction that all homeowners are entitled to, and your accountant will use this form as part of your home-office deduction. If you carry multiple mortgages, be sure to provide Forms 1098 for each mortgage.
What and when you’ll pay
Something else to consider is the deadline for filing your small business tax return. Which taxes you pay, plus how and when you pay them, all depends on which type of business entity you operate. The forms you use to file your federal tax return will be different depending on whether your business is structured as a sole proprietor business, limited liability company, S corporation, C corporation, partnership, etc.
In general, the five types of business taxes include:
- Employment taxes
- Income taxes
- Self-employment taxes
- Estimated taxes
- Excise taxes
In addition, your tax rate can fluctuate based on your total gross taxable income and unearned income, plus whether you’re married filing jointly or separately, whether you are the head of household with dependent children, whether you paid into social security, and so on.
After you’ve figured out all of your earnings and deductions, these will be the forms you need to file and the dates you need to file them by for each business type:
- A sole proprietorship and single-member LLC uses a Schedule C and files with the owner’s personal taxes on April 15th for the previous year.
- A multiple-member LLC files their return on Form 1065 with Schedule K-1 for each member of the LLC. These are due on March 15th for income received the previous year.
- A partnership also files (for each partner) on Form 1065 with Schedule K-1 on March 15th, or the 15th day of the third month after the end of your company’s tax year.
- Corporations file on form 1120. There is no K-1 for shareholders as corporations pay their own taxes. The due date for filing taxes is April 15, or four months after the end of the tax year.
- S corporations file returns on Form 1120 S, with Schedule K-1, for each shareholder. These returns are due on March 15th or three months after the end of the tax year.
- Self-employed individuals pay quarterly taxes on Form 1040-ES. Dates for filing are: April 15th for the first quarter, June 15th for the second quarter, September 15th for the third quarter, and January 15th for the fourth quarter, unless the 15th falls on a weekend or holiday. In this case, you will file the next business day.
Keeping all these forms and figures sorted out can be challenging, but you don’t need to bear the mental burden alone. A tax professional can help as long as you provide the right documents.
The end of the line
Trying to determine your tax liability, what your filing requirements are, and how to file a federal income tax return as a small business owner can be arduous. That’s why many business owner’s employ the help of an accountant to lend a hand. In addition, digging in and gaining some personal knowledge about tax filing and small business taxes can help the whole process go a lot smoother and be a lot less confusing.
Keeping good records all year long, documenting transactions, and compiling the necessary documents needed to file your small business taxes throughout the year can make the whole process of filing your taxes so much easier, and help you avoid a few headaches when tax season rolls around.
For more tax-time tips, see our guide to itemized deductions. To keep your business running smoothly all year long, and learn how to stay organized and save time, see our article on 8 free tax resources for small businesses.