If this is your first time filing small business tax returns, this post should help! Handling the first time filing taxes for small business owners is many times an overwhelming experience. Use this guide to make the first time you’re filing taxes for your small business smooth and easy by understating the potential liabilities.
Filing small business taxes for the first time will be exponentially easier if you are preparing for this task year-round. Keeping well organized accounting records is the foundation for making it easy to file taxes for small businesses for the first time, and every time there after!
It’s vital to track all of your daily transactions for your business. There are a number of great online accounting software that makes this daily recording simple and quick. The records you keep will help you report the correct figures when you file your small business taxes. In addition, doing this for yourself will help reduce your overhead as your accountant won’t have to bill you for as many hours.
Business Taxes & Structures
When you found your company it’s required to choose which business structure you’ll be. There are various tax liabilities for the different business structures. It is vital to choose the right business structure that fits the type of business you are starting.
There are some business structure types that hold the owner responsible personally for the company’s taxes. In other cases the business structure separates the owner’s liability from the liability of the company’s taxes. Each of these different business structures require a different form for the IRS. Learning how to file taxes for small businesses will vary depending on the structure you choose.
Learn about the four common business structures and the tax responsibilities for each:
A sole proprietorship is a business structure where there is a single owner. It is the most simple way to structure a company and has the least amount of regulations from the government.
In a sole proprietorship the owner is considered the same legal entity as t he business. In a case where the business isn’t able to pay tax debts, the sole proprietor may have their personal assets at risk to pay the business’s debts.
Form from the IRS that you will need:
Self-Employment Tax – Schedule SE
In the case that you’re self employed make sure to use a Schedule SE to figure out any monies owed in self-employment taxes. File the Schedule SE self-employment form when you are self-employed and make $400 or more in a tax year.
Profit or Loss From Business – Schedule C
Sole proprietors fill out the Schedule C to report expenses and income to the IRS. A Schedule C is a section of the 1040 Tax Form.
The partnership business structure is one where there are two or more owners. With this structure the partners share losses or profits equally. That is unless there is a partnership agreement that states otherwise.
Much like in the case of a sole proprietor a partnership has the same personal tax liability. If the business is unable to pay it’s own tax debts, they will be assessed to the owners in the partnership.
Form from the IRS that you will need:
U.S. Return of Partnership Income – Form 1065
A partnership business structure isn’t obligated to pay federal income taxes. The 1065 Tax Form is used to report expenses and income to the IRS.
To file for the business in the partnership each of the partners is sent a 1065 Form Schedule K-1. This will show each partner’s share of the income and losses. The Schedule K-1 is used by each of the partners in filling out their own personal income taxes.
When a business chooses to structure as a corporation, or a C Corp, the owners are considered a separate entity from the business. This is used to protect owners from any potential tax debts that the business isn’t able to pay.
Corporations protect owner’s personal assets but are double taxed. First the income is taxed at the level of the business and then again each of the owners are taxed on their income.
Form from the IRS that you will need:
U.S. Corporation Income Tax Return – Form 1120
To file for your small business taxes use the 1120 Form to calculate and file the business’s federal income taxes. This is the same form that’s used to report the corporation’s income and expenses.
Limited liability company (LLC)
In the limited liability company business structure there is a combination of partnership and corporation. Much like a corporation the owners are separate entities from the LLC. An LLC is similar to a partnership in that owners share tax liability.
An LLC limits the amount of each individual owner’s personal tax liability. The taxes are passed through to each owner’s personal income, so the business is not double taxed (like in the case of a corporation). Depending on the way in which the owners set up the LLC the company will file as a partnership, corporation, or as part of each owner’s personal taxes. The forms needed to file will depend on which is chosen.
Tax deductible expenses
As this is the first time you’ll be filing taxes for a small business, you’re likely unfamiliar with what are, and are not tax deductible expenses. In many cases filing will allow you to subtract a portion or all of the cost from the total owed taxes.
In an SBA article, Caron Beesley, a writer, marketing communications consultant, and small business owner said:
Petty cash purchases, magazine subscriptions, educational classes and more. These ‘small’ expenses can add up quickly. Make sure you track all your expenses and check with your tax advisor about what you can and can’t deduct.
To claim these small business tax deductions it is vital to keep accurate and complete accounting and financial records. You need to be able to prove that you purchased and item for your business, and not personal use. Read about fire common small business tax deductions.
Employee expense deduction
If your company employees workers there is a portion of your payroll expense that might be deductible. It is possible for small businesses to deduct contributions to employee benefits and wages. There are certain regulations that need to be followed to properly claim the employee expense deduction.
Home Office Deduction
You are able to deduct the areas of your home that you utilize for business operations. When using the home office deduction it is critical that you only claim the areas that are solely used for the operation of your business.
Business use of a vehicle deduction
It is possible to claim the use of your vehicle whenever it is being used for business purposes. This would include fuel but no include travel from your home to your business or any parking fees or traffic tickets that are assessed during work hours.
Travel Cost Deduction
When travel is needed for business purposes it can be claimed as a deduction on your taxes. Any travel must be necessary, ordinary, and reasonable for your business. It is not possible to deduct for personal vacations or travel that isn’t related to the operation of your business.
Professional and Legal fee deduction
If you’ve needed to pay for any professional or legal fees there is a chance you can deduct them on your filing for your taxes. These fees also must be deemed necessary, ordinary, and directly involve your small business.
Donating to charity is more than good business citizenship; it can also save tax. Food donations, Qualified conservation contributions and S corporation stock donations can also help you get an additional deduction on your small business tax return. Read more about charitable deductions here.
First time filing taxes for small business
It is important when filing your small business taxes for the first time that you carefully follow the tax form instructions. Ensure that you fill out all of the fields carefully with the correct information. Mistakes made when filing taxes can lead to audits, fines, and IRS penalties.
Once complete send the form to the appropriate government agency. Instructions are how and were to send the forms will be located on the form. Ensure that you send the forms so they will arrive before the deadline.
Keep in mind, this article focuses on filing taxes for federal tax liabilities. It will also be necessary for a small business to file taxes for the state and potentially the county and city. Ensure you check with your local and state business agencies to find the appropriate tax obligations and any necessary forms.
Keeping track of income and expenses is a vital part of filing taxes for small businesses. To simplify keeping track of this information for your small business books, let Partridge & Associates take care of your business taxes or small business tax preparation so you knows its done correctly.
Partridge & Associates Offers Professional Small Business Tax Preparation
If you do business in the Phoenix or Scottsdale area, Partridge & Associates can help you with your business taxes. Partridge & Associates offers professional business tax preparation, including small business tax preparation services.