The IRS reported that it plans to increase the number of small business audits by 50%. Taxes are already stressful for small business owners.
You have to make sure that you know everything about business tax preparation before you file your taxes. That’s one of the ways to protect yourself and your business.
There is good news, though. Preparing your taxes is about to get much easier. Keep reading this article for the business tax preparation checklist that will help you with your taxes.
1. Set a Good Foundation for Taxes
If you have a good foundation in place, you will avoid tax issues and penalties with the IRS. A bookkeeping system keeps track of your income and expenses.
The best way to do this is to use software programs such as QuickBooks and Wave. You’ll want to work with a CPA to make sure your accounts are categorized correctly.
Another area where companies get into tax trouble is in how they classify their employees. Remote work increased during the pandemic.
Employers want to classify some of these workers as independent contractors. The tax burden shifts from employers to workers, because independent contractors pay their own taxes.
Some business owners see this as an opportunity to get out of paying payroll taxes. If you misclassify workers, you will face fines and tax penalties.
Take a look at this test from the IRS. You’ll be able to use this as a guideline to properly classify your workers.
2. Which Forms Does Your Business Need to File?
Do you know which forms your business needs to use to file taxes? It depends on the legal form of the business.
Sole-proprietors and single-member LLCs use Schedule C to file business taxes. You file your personal income taxes using Form 1040 and attach the Schedule C.
Form 1065 is used for multi-member LLCs and partnerships. This shows the profit and loss for the business. Include Form Schedule K-1 to outline the income and deductions.
Members and partners are taxed on the profit of the business on their personal income taxes. They have to pay taxes on the profit, even if they didn’t take a distribution.
Form 1120 is for C-corporations. The business gets treated like a separate entity, and its shareholders don’t need to report profits on their income taxes.
Finally, there is Form 1120-S, which is for S-Corps. Similar to multi-member LLCs and partnerships, you report the profit loss for the business.
You pay taxes on your portion of the income. The thing to note about S-corps is that single-member LLCs can elect to get taxed this way.
3. Tax Filing Deadlines
One of the reasons why small businesses get penalized by the IRS is because they file and/or pay taxes after the deadline.
It’s your job to know when taxes are due, and it’s not always April 15.
S-Corps, multi-member LLCs, and partnerships file their taxes on March 15.
Sole-proprietors, corporations, and LLCs taxed as corporations pay their taxes on April 15. This is the case if the fiscal year ends on December 31.
What about corporations that have a fiscal year that doesn’t end on December 31? You have until the 15th day of the fourth month after the fiscal year.
Many corporations have a fiscal year-end on June 30. In this case, the tax deadline is October 15.
4. Gather Tax Filing Documents
You know which forms you need to file taxes. What else is there? Well, you need to have your income statements and profit and loss statements.
Get your tax ID number or have your social security number handy, too. That’s followed by your credit card statements, receipts, bank statements, and estimated taxes.
You’ll need your payroll records if that applies to your business. If you’ve been in business for more than a year, having last year’s tax return is helpful as well.
5. Calculate Your Business Profit
Your business profit is the total revenue minus deductions. It’s pretty easy to figure out your income, just make sure you reconcile that with your bank statements to ensure accuracy.
If you have a cash-based business such as a CBD or cannabis business, you have to include all cash transactions. You can’t afford to make any errors because these transactions get scrutinized by the IRS.
Most of your tax liability comes down to the deductions you take. You can’t deduct an expense for the sake of getting a deduction.
There has to be a good business case for it. Otherwise, it won’t fly with the IRS.
Look for things like car mileage deductions, health insurance credits, home office deductions, and travel deductions. These are often missed by small business owners because they didn’t know about them.
6. Work With a CPA
It’s time to bring a tax expert on board. CPAs spot missed opportunities and help you figure out if you need to file for an extension or not. They might be able to help you take advantage of tax credits.
There are business tax preparation accountant providers such as www.taxfyle.com/small-business-tax-filing and TaxHub. You can also work with a CPA in your area.
7. Always Maintain Records
The best way to protect yourself in the event the IRS questions your tax returns. That’s by keeping good records.
Keep your income statements, invoices, payroll records, and receipts for about seven years.
Did you make estimated tax payments during the year? Make sure you have records such as canceled checks and confirmation emails. There are times when these payments aren’t credited to your account and you have to show that you did in fact pay your taxes.
Business Tax Preparation Simplified
Business tax preparation doesn’t have to be complicated. With this business tax checklist, you know what you need to file your business taxes.
Now that you understand business taxes, you’ll need to know how to grow your business. Be sure to visit the Business section of this site for more great tips!