As tax season begins, there’s a lot to think about, such as what business deductions you might take and what taxes small businesses have to pay. To help you prepare and get ready, we will cover the following topics:
While paying taxes is arguably one of the least enjoyable aspects of running a business, our series is designed to make tax time much easier and a little less painful. To help you start preparing for tax time, here are some helpful ideas.
Plan Your Tax Year Based on Your Business Structure
April 18 is the date that looms large for individual returns, but businesses may also face other deadlines throughout the year. It’s important to keep track of the dates so you have the proper paperwork prepared and the money available to pay anything you might owe.
In the 2016 calendar year, you will pay taxes on income you made in 2015. The date on which your payments are due will depend on how your company is set up.
For a sole proprietorship or an LLC owned by one person, the tax deadline is the same as for individuals, April 18.
Partnerships have to file an additional form that informs the IRS about income and other business financial activity by the 15th day of the fourth month after the end of the partnership’s tax year. Any taxes due will be paid on the partners’ individual tax returns by April 18.
Multiple-member LLCs are taxed similarly to partnerships with an additional April 18 filing for Schedule K-1.
Subchapter S corporations must file by March 15.
Corporations (that haven’t filed a Subchapter S election) can choose any date as the end of its financial year, although once chosen, it can’t be changed. Corporate tax returns and any payments owed would be due on the 15th day of the third month after the end of the company's fiscal year. For a December 31 year end, that’s March 15.
Along the way, there are other important dates and deadlines to note. If you have employees, you’ll need to provide them with the wage documentation they need to file their own returns, and payroll taxes will need to be paid on a regular basis. If you are self-employed, you may need to pay a self-employment tax and quarterly taxes on your estimated earnings for the year. State deadlines may be different than federal deadlines.
Your accountant can help you get set up for all the appropriate dates for the year, and the IRS has an online calendar noting all of the federal tax deadlines. Efile.com has a list of links to state deadlines.
What Records Should You Keep?
There are many reasons for keeping good records of your business’s financial transactions. Accurately entering the information will help you prepare the financial statements you need to run the company properly and prepare your tax returns.
The records you keep have to support the income, expenses, and credits you report, and be available for the IRS to inspect. If you get audited, you may be asked to explain or prove the claims you’ve made and the information you’ve provided. The responsibility will be on YOU to be able to prove any entries, statements or deductions on your tax return.
The IRS has a list of the documentation it recommends you hold on to in order to back up your figures. Generally, it includes all the documents that support your income, purchases, expenses and assets. Think along the lines of bank records, credit card receipts, canceled checks, register tapes, invoices, petty cash slips, and business travel and entertainment receipts. Also hold on to your previously filed tax returns.
Information can be kept as hard copies or in digital form (such as scans), as long as IRS standards are met. If you are scanning and storing records on your computer, be sure to keep a cloud or other backup.NeatReceipts has software that scans receipts and exports the information into most accounting software programs.
How Long Should You Keep the Records?
For tax purposes, the IRS says you should keep the documentation until the period of limitations for that return runs out. The IRS lists the specifics on its website, but generally, if you have filed a return that contains all of the income you’re required to report, keeping records for three years is sufficient.
There are exceptions, however, so check the IRS site and speak with your accountant. In some cases, the IRS can audit you up to six years after you file, so you may want to err on the side of caution and keep receipts and other paperwork for that long. Records of employment taxes should be kept for at least four years.
Also keep in mind that there are reasons not related to taxes to hold onto records, such as for insurance or creditors, so the IRS guidelines aren’t the only ones you might want to follow.
How to Get Organized
If you are following our small business bookkeeping tips, you’re already a long way toward being well organized for filing your taxes, especially if you’re using accounting software. It’s easy to integrate that software with all the major tax applications like TurboTax or TaxACT, whether your accountant does it for you or you do it yourself.
With an accountant or on your own, here’s how to make sure you’re as ready as can be.
Stay on top of your business transactions. Make good record-keeping a habit. Some business owners enter their sales and expenses daily, others do it weekly, and some wait for one, big monthly reconciliation. Frankly, the more often you can do it, the better. Everything will be fresher in your mind and the paperwork will be less daunting when it doesn’t pile up.
Collect all of your receipts and statements. Keep all your receipts, even if you just write a note or two on the back and put them in an envelope for the month. This is especially important for documenting business travel or entertainment expenditures. Note who you were with and what the business purpose was. Consider an expense-tracking app for your phone, which can store images of receipts and notes together.
Make sure you have documentation for every purchase you’re claiming a deduction for, including medical expenses, interest, and charitable contributions. If you cover certain expenses for your employees, like supplies and union dues, those are deductible, as well. Keep an accurate log, including the date you paid for something, why, and a receipt for the purchase.
If you have a home office used for business, you may qualify for the home office deduction. Keep records of how much you spend on things like homeowners’ insurance, mortgage, utilities, and maintenance. Similarly, if you use your personal vehicle for business (other than commuting), keep records of the miles you drive for work, repairs, fuel, oil changes, etc.
You’ll need statements concerning any investments you have, such as stocks, bonds, mutual funds, real estate and interest.
If you or your spouse has income from another employer, you’ll also need W-2 or 1099 forms for that. The originals are filed with the IRS and matched to your tax return, so be sure to get and include them with your income.
Recognize and deal with any difficulties. If you don’t have the proper information or documentation to prepare your return correctly, don’t put off handling the situation. Extensions are available, and you or your accountant will save a lot of stress if you file for one early rather than waiting until the last minute.
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