Some of you may have this misconception that taxes should only be a concern during tax season (January to April), but tax preparation is a year-round process and the full groundwork must be established as early as October, even more so when you run a small business.
Preparing taxes as a small business owner can feel overwhelming, but it doesn’t have to be! Use the resources below as a checklist to help you prepare for the upcoming tax season.
Accurate and consistent recording of your cash flows is crucial in ensuring that you’re filing your taxes correctly.
QuickBooks Online makes it easy to track your expenses, manage cash flow, pay bills, create estimates and invoices, keep inventory, and manage your payroll (among many other things). Did you know we have certified QuickBooks Pro Advisors on staff to help you with your bookkeeping and troubleshooting needs? Contact us today to connect with one of our QuickBooks Pro Advisors.
Whether you decide to use QuickBooks Online or any other bookkeeping software, the key is to ensure you are tracking throughout the year so when tax time comes, pulling your reports is a breeze.
Once tax season has finally arrived, it’s time to gather documents and prepare them for your business return.
Make sure you have the following organized and ready:
- Taxpayer Identification Number
- Personal Information
- Previous Year’s Tax Return
- Financial Business Reports
- Tax Forms
- Asset Information
- Loan Information
- Income Records
- Expense Records
- Payroll Data
- Inventory Total
- Stocks & Bonds Information
You should also use this time to review your previous tax returns to check if you’ve missed any tax credits and deductions so you can file an amended return for yourself, using IRS Form 1120-X.
Tax deductions and credits save your business money, so it is important to take advantage of the ones you qualify for. Depending upon which business tax return you have to prepare, your options will be different.
While it varies for each business, here are a few to research or discuss with your tax preparer:
• Self-Rental – Many small business owners do not pay themselves rent for the use of the space for business purposes. However, this creates a problem because you won’t be able to deduct the building’s operating expenses to the extent of the rent from your business’ income, because the building has generated a passive loss. Thus, you cannot deduct this from your business’ gross income which leaves you with higher tax liability.
The best practice is to have your business pay monthly rent for the office space as this is a deductible business expense. The Internal Revenue Service requires that self-rentals be charged at a “fair market value” rental rate.
• Advertising – Expenses such as printing business cards, social media ads, print or digital advertisements, etc. are deductible.
• Home Office Deduction – To qualify, you must use the home office area regularly and exclusively as your principal place of business, a place to meet or deal with clients or customers, or as a separate structure used in the business.
• Qualified Business Income Deduction (QBI) – 20% of qualified business income can be deducted from the owner’s personal tax return.
• Startup & Organizational Costs – You can deduct up to $5,000 in startup costs and $5,000 in organizational costs (such as incorporating) incurred in the first year of business (but only if costs did not exceed $50,000 in total). The remaining costs (up to $40,000) are amortized over 15 years.
• Membership Dues – Dues from professional and business-related organizations, i.e. chambers of commerce, civic organizations, or trade associations can be claimed as deductions.
• Franchise and Trademarks – If you buy a franchise, trademark, or trade name, the amount you paid or incurred as a business expense, with certain stipulations, are deductible.
• Cancellation Fees – If you booked a business trip and had to cancel and reschedule, the airline rescheduling fee, as well as the hotel deposit you lost, are deductible.
• Credit Card Convenience Fees – A small business that uses credit cards can deduct convenience fees charged by the card companies.
• Education Expenses – Ordinary and necessary expenses paid for the cost of the education and training of the owner(s) and employees are deductible.
• Business Mileage – You can take the standard mileage deduction for business trips using your personal vehicle. Just be sure to keep a log of the date, beginning and ending odometer, and business purpose for the trip.
• Business Use of Cell Phone – You will need to calculate how much you use the cell phone for business purposes, i.e. business calls, checking business email, texts with clients/customers, posting to the business’s social media accounts.
• Parking Fees and Tolls – When traveling for business purposes, these are deductible.
• Health Insurance Premiums – If you have an individual/family health plan (cannot be a group plan) and pay your healthcare premiums out-of-pocket without tax breaks or subsidies you can possibly deduct the premiums.
• Petty Cash Expenses – Keep all receipts for business expenses you pay cash for.
- Research and Development Tax Credit – The R&D tax credit is aimed at supporting qualified businesses in activities related to the development, design, and improvement of products, processes, or software, by providing them with cash savings that can be used to further their research and development activities.
With the recent passage of the Inflation Reduction Act on August 16, 2022, the claimable credit doubled from $250,000 to $500,000.
- Clean Energy Tax Credit – This tax credit, provided under the Inflation Reduction Act, incentivizes businesses’ efforts in going green and contributing to the reduction of carbon footprint:
- 30% of the amount spent on switching to low-cost solar power;
- 30% of purchase costs for clean commercial vehicles; and
- $5 per square foot of the building where energy efficiency improvements have been made.
- Alternative Fuel Credit – If you’re using or selling alternative fuel for use in motor vehicles, motorboats, or aviation, then you can claim this credit against your excise tax liability at the rate of:
- $0.50 per gallon of liquid alternative fuels, and
- $0.50 per gasoline gallon equivalent of non-liquid fuels.
Originally set to expire on December 31, 2021, the Alternative Fuel Credits has been extended until December 31, 2024 by virtue of the Inflation Reduction Act.
- Work Opportunity Tax Credit – This tax credit is available to all employers who hire individuals who are members of targeted groups who due to physical or mental disabilities, have a hard time finding employment.
The credit is computed at up to 40% of the first $6,000 in wages that employees earn in their first year of work, capped at $2,400 per employee. To be included in the computation, the employees must have been employed for more than 120 hours but less than 400. There are other requirements that vary per targeted group so be sure to check them out.
- Employee Retention Credit – The ERC is a refundable tax credit on qualified wages and was used to help businesses that experienced government shutdowns or had a reduction in gross receipts. This can be claimed by eligible businesses that paid qualified wages from March 13, 2020 to September 30, 2021 (December 31, 2021 for Recovery Startup Businesses).
Although it has already been terminated with the passage of the Infrastructure Investment and Jobs Act, if you haven’t filed your claims yet, you can still retroactively file your claims within three years from the ERC program’s termination.
Keep good records by properly categorizing and filing the receipts for all of your expenses and familiarize yourself with tax laws related to small businesses so you don’t miss any tax write-offs/ deductions and credits that are available to you.
Ensuring you are meeting the tax filing dates is essential. Dates differ depending on your business model or structure, so it’s important to stay on top of when you should be doing what.
For example partnerships, S Corps, and multi-member LLCs will file on March 15, while single-member LLCs, C Corps, and sole proprietors will file on April 15. This is not the only due date that varies so a great way to stay prepared is to create a digital calendar containing any important tax deadlines, tax appointments, or quarterly payment dates.
Creating a digital tax preparation calendar not only helps you with preparation, but also prevents losing track of time and accruing penalties due to not submitting taxes on time – everyone wants to avoid late fines and interest.
If you experience setbacks in your business and find yourself scrambling to prepare on time, you may file for a six-month extension. Keep in mind, such an extension must be filed prior to the March/April 15 due date (depending on the return you’re filing).
When filing your extension, make a note of the reason for your request. Use the guide below to determine which form you need to fill out.
- S Corps, corporations, multi-member LLCs, and partnerships: 7004 Extension Form
- Sole proprietor, single-member LLC: 4868 Extension Form
Now that you’ve organized your books and records and you’ve gathered your documentation it’s time to determine which business tax return you need to prepare. You can use this as a guide when it’s time to file:
- S Corps file an 1120-S
- Corporations file an 1120
- Partnerships & Multi-Member LLCs file 1065 & Schedule K-1
- Sole Proprietors & Single-Member LLCs file Schedule C
Most small business owners are hesitant to ask for help and do the tax preparation themselves, which is impractical and not as cost-efficient as they think. Not only does this add to their many responsibilities, we often find that business owners will pay more taxes when filing on their own, as they often don’t understand tax laws. Relying on an accountant to plan and prepare your taxes will help avoid any legal issues, outline financial strategies, and generate reports that help you make good business decisions for the future.
Why Small Businesses Need an Accountant Year-Round
You will often hear small business owners discuss their need to meet with an accountant around tax time, however, business owners would benefit from working with an accountant year-round to analyze financial data, reporting, and help guide key decisions within the company to increase profit.
At MBE CPAs, we take pride in our work and would love to assist. Talk to us today to learn more about the services we offer.