The new year is always a busy time for small businesses, especially if you add tax filing to the whole equation. It can be inundating. I have been there, so I know the feeling. I understand how much many small businesses dread tax season and anything that has to do with filing. This is why I have put together this Small Business Tax Preparation Checklist to help you through the process.
By following this step by step, you will be able to cover all loose ends and ensure you are not running afoul of any regulations or rules from the IRS or state and local taxation authorities. Also, you will never have to worry about forgetting anything or stress over your tax filing anymore.
Let’s get right into it.
Know Your Due Dates
The first next step on your business tax planning checklist is to be familiar with when your company taxes are due. Your filing deadline is dependent upon your organization structure.
For many people, April 15 is the date that sticks in their thoughts when they must have their tax returns completed. However, for smaller companies, deadlines may depend on which sort of company you’ve got and the way you’ve selected to put this up for legal purposes.
Many small businesses end up having the same tax deadlines as individuals. Others, however, have entirely different due dates to take into account.
- Sole proprietorships, single-member LLCs, multi-member LLCs, taxed as companies, and corporations that finish their tax year on December 31 must file by April 15. This is the same due date as personal tax returns.
- Partnerships, multi-member LLCs, and S Corps have a tax filing deadline of March 15.
If March 15 or April 15 falls on a weekend or holiday, you have until the following business day to document.
|March 15||April 15|
|Multi-member LLCs||Single-Member LLCs|
|S Corps Filing 1120 – s||Corporations with 31st December as their year-end|
Get Acquainted With Your Tax Forms
Much like deadlines, the particular tax forms you will need depend on the specific business entity you have selected to use for the business.
Every company needs slightly different forms, but the overall idea is the same: Returns generally incorporate a summary page that supplies a high profile look in your tax image, with supporting attachments and schedules to dig into for more details.
Having and using the appropriate forms is essential to satisfy the rules.
|Business Type||Tax Returns Forms|
|Sole Proprietorship||Schedule C|
|Single-member LLCs||Schedule C|
|Partnership||Forms 1065 & Schedule K-1|
|Multi-member LLCs||Forms 1065 & Schedule K-1|
|LLCs Taxed as Corporations||Form 1120|
|S Corps||Form 1120-s|
Update Your Financial Records
Below are some of the common financial records you are expected to provide for your business’ tax returns:
- Income statement
- Balance sheet
- Bank and credit card statements
- Payroll documents
- Last year’s business tax return
- Partnership agreements
- Accounting documents
- Asset purchase details
- Depreciation schedules
Making sure all this information is on-hand before the start, business owners may make the tax planning process less stressful. Ideally, it would be best to use business accounting applications to create the majority of these financial documents.
The IRS would like to know how much income your business has earned. The tax service has independent strategies to confirm the amounts you report. It is therefore critical not just to give correct information but also to be able to document them.
What is suitable for documentation depends on the jurisdiction and the type of income. Still, you’re going to want to have it available if you are audited.
The IRS should know precisely who is filing and who’s insured on your tax return. To do it, you may need Social Security numbers and your dates of birth, that of your partner, and your dependents.
Not every earnings listed below will apply to you, so select those that do and be sure to have that information accessible.
- Income from jobs for you and your spouse
- Investment income and stock option information
- Income from state and local income tax refunds and unemployment
- Taxable alimony received (Applicable to divorces finalized before January 1, 2021)
- Business or farming income—profit/loss statement, capital equipment information
- If you use your business home—home size, office size, home expenses, office expenses
- IRA/pension distributions
- Rental property income/expense—profit/Loss statement, rental property suspended loss information
- Social Security benefits
- Income from sales of property—original cost and cost of improvements, escrow closing statement, canceled debt information.
- Prior year installment sale information, principal and Interest collected during the year, SSN, and payer address
- Other miscellaneous income—jury duty, gambling winnings, Health Savings Account (HSA), scholarships, etc.
Adjustments to your taxable income:
The under-listed can help reduce your tax amount, increase your tax refund or defer your tax.
- IRA contributions
- Energy credits
- Student loan interest
- Medical Savings Account (MSA) contributions
- Moving expenses (for tax years before 2018 only for federal returns, but your state might still allow it)
- Self-employed health insurance premium payments
- Keogh, SEP, SIMPLE, and other self-employed pension plans
- Alimony paid that is tax-deductible (Applicable to divorces finalized before January 1, 2021)
Cost of Good Sold
Cost of Goods Sold (where applicable)
- Opening to inventory total dollar amount
- Inventory purchases
- Ending inventory total dollar amount
- Items removed for personal purposes.
- Materials & Supplies
Ensure you have records of all your expenses. I have attempted to write out an elaborate list below to help you capture what you might need for your business.
- Wages paid to employees
- Wages paid to employees: Federal and state payroll returns
- Wages paid to employees: Employee benefit expenses
- Wages paid to Contractors
Office Space Expenses
- Rent expense: Office space rent
- Rent expense: Business-use vehicle lease expense
- Office-in-home: Square footage of office space
- Office-in-home: Total square footage of home
- Office-in-home: Hours of use if operating an in-home daycare.
- Office-in-home: Mortgage interest or rent paid
- Office-in-home: Homeowner’s or renters’ insurance
- Office-in-home: Utilities
- Office-in-home: Cost of home, separate improvements, and first date of business use
- Depreciation: Cost and first date of business use of assets
- Depreciation: Records relating to personal use of assets
- Depreciation: Sales price and disposition date of any assets sold
- Business insurance: Errors and omissions
- Interest expense: Business loan interest
- Interest expense: Investment expense and interest
- Phones (landline, fax, or mobile phones related to business)
- Computer & internet expenses
- Transportation and travel expenses (Local transportation, Travel away from home)
- Business trip (mileage) log
- Contemporaneous log or receipts for public transportation, parking, and tolls
- Airfare or mileage/actual expense if drove
- Meals, tips
- Taxi, tips
- Internet connection (hotel, Internet café, etc.)
- Commissions paid to subcontractors – File Form 1099-MISC and 1096 as necessary
- Professional fees: Lawyers, accountants, and consultants
- Office supplies: Pens, paper, staples, and other consumables
- Other expenses: Repairs, maintenance of office facility, etc
- Other expenses: Estimated tax payments made
- Other expenses: Other business-related expenses
- Other expenses: Health insurance
- Other expenses: Premiums paid to cover the sole-proprietor and family
- Other expenses: Premiums paid on behalf of partners and S corporation shareholders
- Other expenses: Information on spouse’s employer-provided insurance
Tax Deductions You May Qualify For
- Startup cost
- Salaries, wages, and benefits
- Taxes and licenses
- Advertising and Marketing
- Bank Fees
- Bonus Depreciation
- Business Gifts
- Business Incomes
- Business Insurance premiums
- Business Meals
- Charitable Contributions
- Business Use of Vehicle
- Contract labor
- Cleaning supplies and janitorial services
- Child and dependent care
- Education Expenses
- Health Insurance
- Family and medical leave (paid)
- Home office
- Legal and professional fees
- Healthcare out-of-pocket expenses
- Moving Expenses
- Local travels
Maintenance and repairs
- Organizational cost
- Real estate losses
- Retirement plans
- Research and development
Several tax breaks are accessible to small companies, but you generally have to show that you qualify for them. From time to time, you will need to submit that proof to tax bureaus to claim your tax benefits, while in other instances, it’s enough that you have it accessible.
Many times, receipts are adequate to record expenses. However, with a few deductions, broader proof is demanded. Make sure you find the correct information for the right deduction. Doing this properly upfront is a great deal more effective than getting adjusted data later on.
Update Mileage Log
Should you use your personal car for the company, deducting your tax return’s standard mileage rate is typically more valuable than deducting your actual vehicle expenses for the year. The trick is you need to keep track of your mileage to create the proper deduction.
Luckily, the days of maintaining a paper log are long gone. You will find several mileage monitoring apps you can install on your smartphone to monitor and generate mileage painlessly.
Before scheduling your tax consultation, ensure that your mileage log app is updated and all trips have been correctly categorized as business or private. Print the report and take it to your tax preparer, together with your car mileage at the start and the close of the tax season.
Avoid the temptation of “estimating” your mileage deduction. The IRS requires you to maintain a log. Failure to do this could result in some deduction being disallowed if you are ever audited.
List Out all 1099s received
Forms called 1099s function as “tattletale” records to assist the IRS guarantee taxpayers in reporting all their earnings. If your organization is service-based, you will probably receive 1099s from a range of your clients. If you supplied any work for a business or person as a non-employee, you would be given a 1099-MISC form.
From 2012, credit card processors and payment processing companies like PayPal and Stripe are required to issue a new type of 1099 called Form 1099-K. Form 1099-K is used to report debit or credit card payments above $20,000. Form 1099-K can also be issued if a payee receives payment for at least 200 debit or credit transactions in a calendar year, whatever the yearly dollar amount.
Most tax preparers do not use Form 1099-MISC or Form 1099-K to prepare a business’ tax return. However, they examine them to make sure their customers report as much income as the sum documented on the 1099s received. That is the reason why I included this point as part of the Small Business Tax prep checklist.
The IRS expects you to issue Form 1099 to all non-corporate service providers whom you have paid more than $600 in a given year (This rule doesn’t apply to lawyers, who have to be issued 1099 no matter their corporate standing).
However, there’s an exception: If you cover these services with a debit or credit card, or when you used a payment service like PayPal or Stripe, you should exclude these payments from the 1099 reporting. The payment processor accounts for reporting those payments on Form 1099-K.
Other principles apply to 1099 reporting, therefore double-check your Bookkeeper to be certain you’ve issued all essential 1099s.
Keep Asset Receipts
Assets comprise computers, furniture, vehicles, and other big purchases. Naturally, an asset will probably cost at least $500 and be anticipated to be in use for more than a year.
Typically, businesses depreciate assets gradually, deducting the asset’s total cost over a few years. But as a result of some provision of the tax code called Section 179, you may select to depreciate the price of certain qualified assets all at one time in the year of purchase.
Your tax preparer will have to understand when you bought the asset and what was contained in the cost. This will help determine how much depreciation could be listed in the tax year or if the asset qualifies for Part 179.
Your tax preparer might also need to keep a copy of the receipt or other purchase documentation as part of their working papers.
Separate Loan Principal From Interest On Loan Payment
A common mistake small businesses make is to record their entire loan payments to reduce their liability. Well, what this does is to make your loan incorrectly reflected on the balance sheet. It also doesn’t distinguish the loan amount from interest payment. Loan repayment on the principal amount is not tax-deductible, but interest on the loan is deductible.
Sit with your Bookkeeper and review your loans at the end of the year, ensure the loan balances on the balance sheet is the same as what you have on the statements. The same applies to bank and credit card statements.
Tax preparers may want to review your loan statement before completing your tax return. So be sure to include them in the document you will carry along for your appointment.
Change In Business Ownership
When there’s going to be a change in your business ownership, ensure to inform your bookkeeper and tax preparer for proper guidance. This is because decisions like this have tricky tax implications.
If a business partner leaves the organization, or when you offer a stock option to your workers, your tax preparer has to understand it.
Changes in ownership affect the equity in your small business. Although your Bookkeeper might have listed the modifications to equity on your books at the time of this change –you’ll have to share the changes with your tax preparer.
That is an essential idea for your small company tax planning checklist, mainly because small businesses experience these changes in their growth process.
Remember To Deduct Estimated Tax
Most small business owners should make estimated income tax payments during the tax season. Additionally, business owners need to deposit payroll taxes continuously.
When you complete your tax return, deduct the income taxes you have already paid out of your entire income tax obligation. This way, you won’t pay off your taxes.
Meet With Your Accountant
If you outsource your accounting or keep it in house, your Bookkeeper is a valuable source for small business tax planning.
Alternatively, there are Accounting softwares that take care of all the hassles. All you need to do in the year is ensure you have entered the correct information accordingly. Here’s a list of Top 5 Accounting softwares for small businesses.
The 5 Best Accounting Software for Small Businesses
QuickBooks Online: Best Overall
Xero: Best for Micro-Business Owners
FreshBooks: Best for Service-Based Businesses
QuickBooks Self-Employed: Best for Part-time Freelancers
Wave: Best Free Software
Most bookkeepers don’t prepare tax returns, but an experienced bookkeeper knows many what the tax preparer will require even before he demands them.
Schedule a time to examine the previous year’s books together with your Bookkeeper. Ensure any queries they have for you’ve been solved. Make sure all of your accounts are wholly reconciled.
Review the balance sheet for the correct classification of new asset purchases. Becoming comfortable with your books ahead of your tax appointment is likely to make the process easier for both you and your tax preparer.
Meet With Your Tax Preparer
Sometimes you may need to schedule a meeting with a tax preparer to ensure you have all loose ends covered. Tax preparers are experts in the business of taxation, and they can guide you right.
Remember that the exact date you are working with applies to other small businesses like yours, so don’t wait until the last minute before you book an appointment.
I use accounting software. My Bookkeeper comes in for a few days by the end of January or the first week in February to generate the reports, look through them, then sits with me for a Q&A session. Latest by the middle of the second month, I would have had a meeting with the tax preparer.
As a small business owner, especially startups, you will always have questions about taxes. It’s crucial you get the answers quickly. If you don’t have a tax preparer, you can go online, search and start interviewing.
Experience and skilled tax preparers get active and booked by their clients early enough. You can undoubtedly do taxes by yourself, but as things become more complex with your business, a fantastic professional will help counsel you on tax-saving plans and be certain that your taxes are done correctly.
Even better if you’re able to locate a tax specialist that specializes in your business niche. For instance, some individuals concentrate on serving the needs of small business owners or freelancers working exclusively in the creative sector.
Benefits Of Using A Tax Preparer
Your tax preparer is well vast in tax matters for small businesses, and they will be able to advise you accordingly, especially on how to legally reduce your tax liability, some of which are listed below.
Less taxable income means less taxation, and 401(k) is a favorite method to decrease tax bills. The IRS does not tax what you invest out of your paycheck to a 401(k).
- For 2020 and 2021, you can invest up to $19,500 each year in an account.
- If you are 50 or older, you can contribute an additional $6,500 in 2020 and 2021.
- Companies often sponsored these retirement accounts. Although self-employed individuals can start their own 401(k)s when an employer matches any or all your employee’s contributions, they’re going to receive free cash to boot.
Contributions to IRA
There are two major types of individual retirement accounts: Roth IRAs and traditional IRAs.
You can deduct contributions to a traditional IRA. The amount you can deduct depends on if a retirement plan covers you or your spouse and how much you earn. For the 2020 tax year, you may not be able to deduct your contributions if a retirement plan at work covers you.
If you’re married and filing jointly, and your modified adjusted gross income was $124,000 or more. In 2021, that number rises to $125,000.
There are limits to how much you can put in an IRA, too:
For 2020 and 2021, the limits are $6,000 per year or $7,000 for 50 or older people.
You have until the tax-filing deadline to fund your IRA for the previous tax year. This is a massive advantage because it gives you extra time.
Federal Tax Credit
There are many Federal Tax Credits small businesses can temporarily or permanently apply to offset their taxes. For instance, the commercial tax credit provides that if you add solar panels to your business, it can allow you to reduce monthly energy costs, add to your building’s value, and reduce your potential taxes.
- Employing a family member
- Saving money for health care needs
- Travel Expenses (If you travel a lot for business)
- Save for college
- Fund your FSA
- Give to charity
Request For Extension
There are instances when no matter how you tried, it may just be impossible to put everything together for the tax filing due date. The IRS allows Small Businesses to file for an automatic extension. It’s essential to request this extension before your due date.
An extension is not a cover not to pay taxes because you will still pay these taxes by the first due date to prevent billed fees and interest.
The process of preparing for tax filing is always very engaging and time-consuming. However, I will still recommend that as a small business owner, be involved in the process for the first two or three years of your company. Be involved with the Accountant and the Tax Preparer, and ask all the questions you need. You will get enlightened, and some of these answers will help improve your business process and tax filing for the following year.
As your business grows, you need to introduce some systems to make your tax filing process more straightforward. Some of these changes are;
- Use Accounting Software applicable to your industry niche to track your income and expenditures.
- Hire a Bookkeeper. Besides ensuring that your books are in order, they can guide you properly in the filing process.
- Create a filing system. Tax filing requires a lot of paperwork, and only a proper filing system can make the job simpler.
- Separate your business and personal income and expenses.
I have tried to create a detailed checklist for your Small Business Tax Preparation. I hope it helps make the process easier.
If you have any questions, comments, or contributions, please feel free to drop them in the comment section.