The very thought of business taxes strikes fear into the hearts of business owners across the nation. And while it’s relatively easy to file taxes for yourself and your family, things get a bit more complicated when you’re running a small business.
We won’t claim filing taxes for your business is easy, but with the right steps and proper bookkeeping, you’ll be in a far better position to file your taxes or have a professional do it for you.
Before we proceed, we have to cover one essential aspect of prepping your business taxes…
Keeping proper records
As a business owner, it’s imperative you keep detailed records of your income and expenses. Otherwise, you won’t be able to take full advantage of any deductions you may be eligible for. Utilize user-friendly spreadsheet software such as Microsoft Excel to keep your records orderly.
There’s also software you can use that’s dedicated for the sole purpose of accounting, such as Zoho and Quickbooks. Do your research and see what works for you in terms of pricing and features.
Here are a few tips to help you improve your record keeping:
1) Approach your record keeping like you would any other vital aspect of your business
Make the time to sit down and get your records in order. If you’re too busy to keep your own records, you could always hire a virtual assistant to do it for you. With so many freelancers in the marketplace today, you should be able to find someone with plenty of experience at affordable rates.
2) Keep your personal and business bank accounts separate
You won’t believe the type of headache you’ll experience when it’s time to sit down and sort through your bank statements for the year, and you’re forced separate your personal expenses from your business expenses. Keep them separate to avoid difficulties.
3) Don’t get the latest and greatest accounting software out there if your budget can’t afford it
Do your research. There is plenty of affordable, intuitive software in the market today that makes accounting a breeze.
Taking advantage of tax deductions
There are dozens if not hundreds of tax deductions you may be eligible for as a business owner. Learn what you can use as a deduction and see if you qualify. If you’re unsure how to proceed, contact a tax professional. Here are a few examples of tax deductions you can potentially take advantage of:
• Tuition (school)
• Transportation used for the business
• Home office space
• Insurance premiums
• Contract labor
• Salaries and wages
Taking full advantage of your deductions can save you thousands in taxes. Make sure you take advantage of every deduction that you can.
Business structure will affect how you pay your taxes
Your business structure will affect the way you approach your taxes. For example, depending on your business structure you may have to use a different form, or operate on different deadlines.
If you’re a new business, there’s a good chance you’ll start off as a sole proprietorship. It’s the simplest business structure, especially when it comes to paying your taxes. Sole proprietorships don’t require a separate business tax return. You will only have to report the expenses and income of your business on your personal income tax return.
Partnerships require that all partners report their share of the businesses’ income and expenses on their personal tax returns. Partnerships also require payment of estimated quarterly taxes (speak with a tax professional to see if this applies to you) and self-employment taxes. Businesses operating as a partnership may also qualify for the newly implemented “pass-through” deduction, which could cut expenses by as much as one-fifth.
Limited liability companies (LLCs)
The number of members in an LLC is what determines its tax status. For instance, a single member LLC will be taxed like a sole proprietorship, and a two-member (or more) LLC will be treated as a partnership. You can also file a form with the IRS to have your LLC treated as a corporation.
C corporations (General corporations)
While small businesses have the option of incorporating, this business structure is primarily designed for larger organizations with numerous shareholders. C corps deals with double taxation in that the corporation and the individual are taxed. Despite this, C corps holds a number of organizational and tax benefits.
S corporations come with a number of tax benefits and are considered to be “pass-through” entities, meaning income taxes at the corporate level do not apply to them. Keep in mind that if you’re a small business owner who’s just starting out you likely won’t transition into an S Corp any time soon due to the fact that they’re complicated and expensive to maintain.
Doing your taxes for your business the right way
There’s much more to doing your taxes for your small business, but this is the basic information you need to know. If you’re unsure of how to proceed, don’t force yourself to tackle your taxes on your own. Don’t be afraid to turn to a professional to ensure your taxes are done properly.
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