A Brief Guide to Tax Filing for New Business OwnersLetizia
New business owners have to deal with a number of challenges as keeping the business afloat for the first few years is of great importance. Their survival strategy should also include tax filing.
As the tax season approaches, startups and entrepreneurs start to worry about how much tax they owe the federal government. While working as an employee in someone else’s company, you don’t have to worry much about tax filing, but when you launch a business of your own, the onus of filing the income tax returns is on you. Therefore, you should be well-prepared.
As a business owner, you hold the responsibility of planning and managing several crucial aspects of your business. You can plan for your taxes in the same way and follow some useful tax filing strategies in a bid to reduce your bill. If you have just started your own business, this brief guide to tax filings will help you navigate the income tax landscape in an effective manner.
Basic Types of Business Taxes
If you are a new business owner, you should remain fully informed about different types of business taxes you’ll need to pay. The federal government requires you to pay four types of business taxes – income tax, self-employment tax, taxes for employers and excise taxes.
Income Tax: As a business owner, you need to file your income tax returns on an annual basis. Income tax filing is not applicable for partnerships though. The federal income tax is paid in regard to how much you earn during a particular financial year. Payment of income taxes also depends on how exactly your business is structured, which we’ll discuss later.
Self-Employment Tax: If you are the sole proprietor of your business, then you need to pay these taxes. The purpose of collecting these taxes is to contribute towards social security and Medicare. Some taxpayers can receive coverage benefits by paying these taxes. It’s important to know that you can use some strategies in case you face problems regarding your self-employment tax.
Taxes for Employers: If you’re running a business with employees, you need to pay the employment taxes. These are imposed to cover social security, Medicare and other taxes for employees. As an employer, you’re required to pay half of the expenses of the social security and Medicare tax. The other half of the expenses has to be borne by your employees.
Excise Tax: This type of business tax, known as excise, is applicable to only a certain category of business owners, the businesses of whom sell and manufacture a variety of products and use various kinds of equipment for manufacturing. The federal government levies these taxes on some specific businesses. Some of these taxes include air transportation taxes, fuel taxes, communication taxes, etc.
What is the Legal Structure of Your Business?
Tax filing situations vary as per the structure of a business. For new business owners, startups and self-employed people, it is very important to understand these structures so that federal tax filing obligations can be fulfilled. Whether you’re planning to start a new business soon or you’re running one already, here is a quick look at the different legal structures in the context of tax filing.
Sole Proprietorships: If the structure of your business is that of a sole proprietorship, you’re required to report your net profit and loss on an annual basis. For this, you need to Schedule C with Form 1040. Additionally, you need to file Schedule SE with the same form. All these business tax filings are mandatory, and you should file your tax returns within the due date.
If your federal taxes amount to at least $1000 (after taking away your withholdings and credits), you’ll also need to pay the estimated taxes.
Partnerships and LLCs: If you have started your business as a partnership or LLC (Limited Liability Companies), you’re required to report your business profit and loss with Form 1065. Businesses with a partnership need to produce copies of Schedule K-1 to the partners. Both the filing and the producing of copies should be done within the due dates.
Corporations: If your new business is set up as a regular corporation, you need to report your profit and loss using Form 1120. The deadlines for calendar year taxpayers and fiscal year corporations are different; therefore, make sure you file your US corporation income tax return on time.
S Corporations: If you own a company having an S Corporation structure, you need to file your income taxes using Form 1120S. In the case of this type of business, copies of Schedule K-1 should be supplied to the shareholders. For regular corporations and S corporations, the due dates for tax filing are the same. You should file your income taxes within this time to avoid discrepancies.
Business Expenses You May be Able to Deduct
When you run a business, you have to take care of a wide range of operating costs. As per the guidelines of the IRS, these costs are tax-deductible, provided they are appropriate expenses.
Some tax-deductible business expenses include:
- Equipment purchases
- Advertising expenses, employee benefit programs
- Telephone and utilities costs
- Rent and office supplies
- Auto expenses
- Meal and entertainment expenses
- Travel Expenses
Any business expenses that you want to deduct must be directly related to the business you own and operate. You can not just include any kind of business expenses because proof of the same will be required.
For new business owners, tax deductions are an important concern. You should take advantage of every deduction that you qualify for. Capturing deductions in an effective manner is a surefire way of reducing the tax bills. Dealing with this area of business tax filing on your own is not a good idea. This is where you should seek the help of an experienced business tax preparation expert. With a tax professional by your side, you can keep yourself safe from suspect tax deductions and avoid the scrutiny of the IRS.
Useful Tax Filing Strategies
Tax filing needs planning and the use of strategies that enable employers to get the most out of tax credits and deductions.
Given below are some of the strategies that you can benefit from:
Tax Credits: Healthcare tax credit and work opportunity tax credits are two key ways for new businesses to produce some savings. Healthcare tax credit is for the ones who have less than 25 full time employees. If you, as a business owner, hire veterans and disabled people, you could qualify for work opportunity tax credit. Another tax credit startups and new businesses should claim is pension plans startup cost credit. For more details on these tax credits and to find out whether your business is eligible for the same, you should talk to a tax preparation professional.
Tax Deductions: Claiming as many deductions as you can and as many as you qualify for is a good tax filing strategy for new businesses. Among other deductions, you should definitely try to claim deduction for certain properties. If you acquired a new place or property for business or business-related purposes, you can deduct an amount of up to $500,000 of eligible property. If you made any charitable contributions, you should also deduct the amount.
There are many such lesser-known tax deductions which an employer should know and avail of. Interest paid on a business loan is also a tax deductible business expense. If you’re making payments against a business loan, you should deduct the paid interest.
Organize Your Accounting Records
As a smart new business owner, you should never forget to keep tabs on how your business is doing. If you’re filing taxes for the first time, organizing your accounting records should always be a top priority. The calculation of income and expenses is quite easy when you have records of all your transactions. You should adopt this practice right from day one. If you collect all the records throughout the year, approaching tax season won’t give you a headache.
Maintaining business records is a great time-saver. Also, well-kept accounting records make the job of a tax professional easier.
Though it happens very rarely, the IRS can decide to audit any taxpayer, so it’s better to be prepared. If the IRS serves you an audit notice after you’ve filed your income tax returns, you have nothing to worry about. Then, you can easily produce all the business records and back up the figures.
Documents you’ll need include:
- Gross receipts
- Checking and savings account interest
- Returns and allowances
- Sales records
- Unclassified income
- Employee compensation (salary, wages, incentives etc)
- Insurance premiums
- Professional fees
- Payments to contractors
- Office space rent
- Transportation expenses
- Travel expenses
- Marketing and advertising expenses
- Office supplies and equipment
- Telephones expenses
- Other communication expenses
To successfully do the taxes and file your tax returns, you should keep all the necessary documents in order.
Start Early with the Tax Filings Process
Tax filing is a complicated process. More so, if you’re going to file income tax returns for the first time. It’s important to pay serious attention to how the entire process works and stay on top of tax filing deadlines. If you start early, you can avoid the risk of missing the due dates. Don’t ever make lack of cash flow a reason for delayed tax filing. Failing to file income tax returns will cost you heavily. If you’re not in a position to pay your taxes, you should look for other options to arrange for the cash flow deficit. You may want to borrow a business loan to avoid missing due dates and failing to file your income tax returns.
The tax filing season shouldn’t take away your sleep. If you start planning ahead of time, you can successfully get your taxes done and file your first tax returns in an effective manner. There are CPAs, enrolled agents and tax professionals to help you with the entire process as well as calculate your tax refund.