March 8, 2022
By the Service Corps of Retired Executives (SCORE)
To help you better prepare for tax season, we asked mentors from the Service Corps of Retired Executives (SCORE), small business owners and accountants for their best tips. From balancing the monthly books to investing in a Point of Sale (POS) system, here are several ideas that may help you prepare business taxes for years to come.
Nine tips for doing business taxes:
- Maximize technology tools
- Completely separate personal and business finances
- Hire a professional
- Invest in a POS system (examples: Square, Shopify, Quickbooks POS)
- Balance the books monthly
- Cultivate a relationship with your accountant
- Determine which deductions are appropriate
- File correctly and take note of deadlines
When financial institutions send electronic statements, don’t delete them. Instead, download, scrutinize, and reconcile the transaction in your e-statements. This way, you’ll be more prepared for the final process of filing your taxes.
Additionally, use accounting software to compute your business earnings, expenditures, and other financial information. Many accounting tools have built-in tax preparation features and will permit the linking of checking accounts and other financial documents. Using technology tools reduces the attendant stress and frustration of doing business taxes, so maximize them.
Completely separate personal and business finances
When you’re first starting out in your small business, it can be tempting to just throw something on your personal debit or credit card instead of a business card. You might even tell yourself you’ll deal with separating it later. It’s best to begin with completely separate finances because it can get really muddy, really quickly, especially if you’re audited.
- Get a business credit card
- Never mix this with personal spending
- Pay yourself a wage, just like you would with an employee
These steps will keep your finances officially separate and it will be easier for you to keep track of for the entire fiscal year.
Hire a professional
Some business owners think they’ll save money by doing taxes themselves. However, this can be a risky bet since they might miss something and become legally liable. If that happens, they’re more likely to pay penalties and end up spending more than if they were hiring trusted professionals. If you’re a small business owner trying to cut costs on every side, don’t cut it on the most important things such as taxes are. Hire a professional, and peacefully focus on what you know the best.
Share insurance premium payments
Life insurance premiums are categorized as a personal expense – and therefore not tax-deductible. But did you know that other insurance premiums may be deductible for the self-employed or if health expenses exceed 10% of your AGI (adjusted gross income)?
Be sure to share which insurance premiums you are paying to your CPA or accountant. The more they are aware of expenses you are incurring like health insurance premiums, the more tax professionals may be able to itemize (and save you money).
Invest in a POS system
A POS system that integrates with your accounting software makes revenue tracking more manageable.
How? It is easier for you or your accountant to determine how much tax you owe the government. If your POS tool doesn’t integrate with your accounting software, you must manually audit every transaction. This is time-consuming and inefficient, especially since there’s a cheaper way to automate the process.
Balance the books monthly
Balancing the books every month not only makes tax preparation a lot more painless but up-to-date financials ensure that the information you are basing business decisions on is accurate and reliable. I’d highly encourage any small business owner to seek bookkeeping help. Your future self and your CPA will thank you later.
Cultivate a relationship with your accountant
It’s important to have a good relationship with an accountant so when anything comes up or you have an urgent question you both are already on the same page. Before you cultivate that relationship, you need to thoroughly vet your options.
- Make sure they have experience with your type of business
- Check all of their reviews, especially on social media where people are usually most outspoken with their opinions
- CPAs are required to partake in continuing education so don’t just settle for someone who says they’re licensed. Make sure they’ve upheld the maintenance as well
Determine which deductions are appropriate
Profits are treated as pre-tax income on both the federal and state level. It doesn’t matter if you pocket it personally, distribute it as a profit-sharing bonus, or put it right back into business improvements. That sum is still all taxable.
You can at least lower your total liability by strategically allocating money toward deductible expenses. This is especially important in your business’ earliest years when you’re eligible for things like the startup tax deductions, which lowers your liability even more during an especially crucial period. It takes a little research to determine which deductions are most relevant for your organization and growth goals, but it’s worth it.
File correctly and take note of deadlines
Make sure you are using the correct IRS tax form. Depending on your business operations, whether it’s a sole proprietorship or an LLC, forms are different.
Example: use a Schedule C attachment or file through corporate taxation (Form 1120 or 1120S if you’re an S-Corp). Once you fill out the necessary forms for your business, take note of the filing deadlines:
- Schedule C forms merge with your Form 1040, including your deadlines, which is normally on April 15
- Form 1120 should be filed by the 15th day of the fourth month after the tax year has concluded
- Form 1120S should be filed by March 15th. All of this is separate from your personal income tax return
LLCs and sole proprietors
Most LLCs and sole proprietors are taxed as a pass-through. In other words, business profits are passed through to your personal tax using IRS form 1040 Schedule C. The resulting profit or loss is typically considered self-employment income. The simpler form Schedule C-EZ was discontinued in 2019.
Usually, if you fill out Schedule C you’ll also have to fill out Schedule SE, “Self-Employment Tax.” You’ll use this form to calculate your Social Security and Medicare tax based on your self-employment income and report it on Form 1040, schedule 2 Part II, Other Taxes.
Who files a Schedule C tax form?
You’ll need to file a Schedule C if you:
- Earn income through self-employment as a sole proprietor or as a single-member LLC.
- You wouldn’t use a Schedule C to report business income and expenses of a C Corporation or S corporation. An LLC can file as a S-Corp under certain circumstances, as a way to save taxes. Contact your accountant for more information.
If you are self-employed, your business clients should send you 1099 forms such as 1099NEC. These forms report the money that a business has paid you during the tax year. You may also need to send 1099s to any vendors or contractors you have paid through your business. These payments are typically included as expenses on your Schedule C along with your other eligible business expenses.
How to prepare for Schedule C
Before you begin to work on your Schedule C, you will need to gather certain end-of-year business information. You will need:
- A profit and loss statement (sometimes called an income statement) showing the entire year’s income and expenses
- A balance sheet for the year ending December 31
- Statements about assets showing purchase of assets during the year
- Information on inventory to prepare a cost of goods sold calculation if your business sells products
- Details on business expenses for travel and auto mileage expense ($0.56/mi for 2021)
- Home office expenses
- Sole Proprietors & LLC
- About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) https://www.irs.gov/forms-pubs/about-schedule-c-form-1040
- About Form 1099-NEC, Nonemployee Compensation
- About Schedule SE (Form 1040), Self-Employment Tax https://www.irs.gov/forms-pubs/about-schedule-se-form-1040
- About Form 1120, U.S. Corporation Income Tax Return https://www.irs.gov/forms-pubs/about-form-1120
- S Corp
- About Form 1120-S, U.S. Income Tax Return for an S Corporation https://www.irs.gov/forms-pubs/about-form-1120-s
- Tax Guide for Small Business (IRS) https://www.irs.gov/publications/p334
- What’s new for 2021 https://www.irs.gov/publications/p334#en_US_2021_publink100049924
Tax Preparation Support
- Find a tax professional near you: National Association of Tax Professionals https://www.natptax.com/Pages/default.aspx