Tax season comes to all businesses big and small, and can be a headache no matter how well you think you’ve prepared. For a small business owner wearing many (or all) hats in the business, it’s an unwelcome extra task sure to cause late hours and frayed nerves. To handle the additional workload during tax season, CorpNet offers some small business tax advice and presents our Tax Season Survival Kit for business owners.
Step 1. Gather All Necessary Documentation
The first step in preparing for taxes is gathering any necessary documentation. Ask your tax accountant for the list of figures and files you need to provide.
The checklist of documentation required for small business taxes may include:
- Income
- Gross receipts from sales or services
- Sales records (for accrual-based taxpayers)
- Returns and allowances
- Business checking/savings account interest
- Inventory
- Items removed for personal purposes
- Materials & supplies expenses
- Expenses
- Advertising expenses
- Phone (landline, fax or cell phones related to business) charges
- Computer & internet expenses
- Transportation and travel expenses
- Local transportation costs
- Commissions paid to subcontractors
- Depreciation
- Business insurance
- Business loan interest
- Professional fees
- Entertainment and dining costs
- Lawyers, accountants, and consultants
- Office supplies
- Office space rent
- Business-use vehicle lease expense
If you run your business from home, you’ll also need the square footage of your office space and the total square footage of your home, plus the cost of your home utilities, mortgage, and any work improvement expenses.
Step 2. Remember Startup Costs if You Are a New Business
The IRS classifies costs associated with starting a new business as either “investigative” or “opening-a-business” expenses.
To qualify as a startup expense (a capital cost), the IRS says the expense must meet two requirements:
- The expense was paid or incurred before the day your active trade or business began.
- The expense would be deductible for your business if you were already operating the business. (Note: The actual business you open must be in the same field as the business you had in mind when you made the purchase.)
Expenses for marketing research include doing surveys or any marketing consultant fees. Investigative expenses include lawyer and accountant fees, plus any background checks.
Other costs associated with opening a business include:
- Travel and other necessary costs for securing distributors, suppliers or customers
- Advertising and marketing costs for the opening of the business
- Training and wages for employees and instructors/classes
- Office setup such as software purchases, website design and development
- Mileage and car maintenance associated with research and setup appointments
Purchasing equipment is not considered a startup expense and must be capitalized and depreciated.
Some of the costs of setting up your business structure can also be considered startup expenses. If you decide to form a corporation or LLC, you can deduct the costs involved in forming the corporation such as directors’ fees, meetings, state incorporation fees, and legal fees. You cannot deduct expenses associated with issuing stock or securities. The rules are similar if you decide to form a partnership.
Step 3. Consider Employer Deductions
January 31 of each year is your deadline to mail an employee their W-2 forms and independent contractors their 1099s. New forms must be ordered each year, so order them early from your payroll service. W-2 forms are also filed with the Social Security Administration (SSA) and show all the wages and taxes your company paid during the tax year. You total your W-2s and file the totals with a W-3 form. Make sure you verify all your employees’ names and Social Security numbers before you prepare the W-2s. You can verify up to 10 names and numbers on the Social Security Business Services Online website.
Employers must deposit and report employment taxes by the IRS deadline schedule. The taxes include state and federal income taxes withheld and both the employer and employee social security and Medicare taxes. There are two deposit schedules, monthly and semi-weekly. Before the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. The schedule for depositing and reporting will not be the same. To determine your schedule, see IRS Publication 15.
Step 4. Review Deductions vs. Credits
Tax deductions lower your taxable income while tax credits directly reduce the tax you owe. Eligible tax credits range from providing disabled access to pension plan startup costs. For a list of possible business credits your business might be eligible for, check the business tax credit section of the IRS website.
Your accountant should be able to give you tips on deductions your business can take, but here are some frequently overlooked deductions:
- Charitable contributions. Did you make any kind of contribution (physical donation or money) to a charity? Consider setting up a monthly donation through your company credit card to make it easy.
- Business gifts. You can deduct no more than $25 for each business gift you give directly or indirectly to each person during your tax year. Gifts to employees could be considered income by the IRS and may get employees in trouble if they are not claimed. Check IRS Publication 15-B for exclusions to this rule.
- Tax prep fees: Fees for tax preparation and filing count as deductions. The same goes for any fees paid to a business financial planner.
- Employee education: If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. For details, see IRS Publication 15-B or ask your tax preparer.
Step 5. Carve Out Time for Taxes
Across the country people are hunkering down to gather tax documents, talking with tax preparers and learning how the new tax laws affect their situation. For small business owners, the stress factor is multiplied, because you’re expected to still run your business and file taxes by the deadline. You can’t make clients wait and you know the IRS won’t wait, so what to do?
It’s important to make sure you’ve communicated the extra time you’ll need in the next few months to everyone involved. That includes family, friends, and employees. Carve out some time each day to make sure you’ve made progress toward filing your taxes while still touching base with the most important business issues at hand. You may need to delegate more than you normally do. Hopefully, you’ve built a good support network to help you through this busy time.
After your taxes are filed, make time to review how you fared this year. Talk to your tax accountant and make any changes necessary to save money and time next year.
