Since there are different ways to prepare and file your taxes, it’s important to first look as to what type of business you're running. If you’re a sole proprietor or using a legal entity such as an LLC or corporation, there are various ways to file your federal income tax return. As a small business owner, including your business profit or loss subject to income taxes, is also required when filing. There will be different tax form that needs to be filled out completely and accurately as well. Calculating your taxable business income, however, is generally done in similar ways. Here are five most important things you need to do when filing your tax return as a small business owner.
1. Organize Your Business Records
It’s important to gather and organize all of your business records before filing to avoid confusion and mistakes. You will need them to fill out any tax form that will ask for our business earnings and expenses. It will help if you prepare them in advance and have them ready in front of you so you don’t have to freak out when tax season arrives. Since almost everyone these days keep, organize, and track all of their business transactions during the year through a computer program or a spreadsheet, calculating income and deductions has never been easier. It’s definitely better than just mentally taking notes because you will more likely forget them. If you’re old school, keeping a notebook with you at all times will help.
2. Fill Out The Right Tax Form
It may be hard to believe but there are taxpayers who mistakenly chose the wrong IRS tax form. Reporting your business earnings to the IRS and paying your tax is given, but filling out the right form to enter your income will depend on your business operation. Most small business owners file as sole proprietorship allowing them to report all of their earnings and expenses on a Schedule C attachment in their personal income tax return. Those who run businesses as a sole owner of an LLC, on the other hand, are still allowed to use the Schedule C attachment but if you decide to use a corporation status or elect to treat your LLC as one, a separate corporate tax return on Form 1120 will be required.
3. Study The Forms Before Filing
The forms you need to fill out is found on the IRS website and can be easily printed through your computer. Make sure you completely understand Schedule C or Form 1120 before you fill them out because inputting all of your financial information on them are crucial and required by the IRS. The simplest form between the two is Schedule C because it only has two pages and allows you to list all the expenses you can claim when filing business taxes.
As soon as you’re done entering the necessary details, you just have to subtract your expenses from your earnings and whatever the total is, will be net profit or loss. This number will then be transferred to your personal income tax form including all of your personal income tax details. The Form 1120, on the other hand, has the same calculation but will require more information that is not always applicable to small businesses. Its filed separately from your personal income tax return which can be a little hassle.
If your business status is C-Corp for tax purposes, a Form 1120 is what you’ll need to fill out. It has to be filed by the 15th day of the fourth month following the close of the tax year (usually April 15). For S-Corp business, a Form the 1120S is required which must be filed by the 15th day of the third month following the close of the tax year (usually March 15). Remember that this particular form has to file separately with your personal income tax return.
4. Follow Our Tax Filing Tips
The above points already tell you to keep your records religiously and check the right forms to fill out. However, you must also be aware of the different deadlines when filing using the forms we mentioned above. It is also best to work with an Accountant or a Tax Professional who’s reputable and experienced to make sure that your business will be able to benefit from the deductions you’re qualified with. Additionally, tax planning must be a year-round-activity to avoid last-minute preparations that make your filing even more complicated. Being aware of law changes by keeping up with the news is another thing you should constantly do. Lastly, do not just depend on a tax professional; be knowledgeable about the tax breaks and policies enacted to ensure that you’re on a right and safe path.
