As a small business owner, understanding your federal, state, and local taxes is vital to your success. Tax planning will help you reduce your taxable income, lower your tax rate and utilize available tax credits and deductions.
Preparing for tax season can be challenging even if you have kept up with your bookkeeping and record-keeping throughout the year. By following a few steps, tax planning and preparation will be easier whether you prepare your own tax returns or work with a tax preparer.
Tips to Getting Ready for Tax Time
There are some things you can do to make sure you have everything prepared to file your taxes accurately and on time.
1. File the Right Taxes for Your Business
The type of business you operate determines what taxes you must pay and how you pay them. There are five general types of business taxes:
- Income tax
- Estimated taxes
- Self-employment taxes
- Employment taxes
- Excise taxes
It’s important to understand the business taxes and deadlines that are required for your particular business.
2. Meet All of Your Tax Deadlines
For business owners, tax deadlines also depend on the type of business you have and how you’ve chosen to set it up for legal purposes. Many small businesses have the same tax deadlines as individual taxpayers. Others have completely different due dates.
In addition, small business owners have other tax-related tasks to complete. Each has its own deadlines, so it’s important to keep track of all of the tax deadlines that apply to your business. Missing deadlines can result in penalties, so marking deadlines on your calendar and ensuring that none are missed is important.
3. Use the Right Tax Forms
The specific tax forms you’ll need depend on the type of business entity you’ve chosen to use. Your tax liability can vary widely depending on your type of business entity. An accountant or tax preparer will be able to explain the impact your business entity has on your overall tax situation.
4. Collect Business Income Records
In the event of an audit, you’ll need to have all income documentation available. What’s acceptable for documentation differs by jurisdiction and the type of income involved. Gross receipts, interest, and investment income from business accounts are all important records to keep.
5. Document All Business Expenses
In order to qualify for the numerous tax breaks available to small businesses, you must be able to prove that you qualify for them. Receipts are usually sufficient to document expenses but some deductions require more extensive documentation.
Home office deductions, transportation, meals, and entertainment require receipts and supporting information. For example, in order to deduct meals, you need receipts along with additional details of who was present and the purpose of the meeting.
6. Gather Your Financial Records
Some of the most common documents that small business owners should have available for tax planning and preparation include:
- Income statement
- Balance sheet
- Bank and credit card statements
- Last year’s business tax return
- Partnership agreements
- Depreciation schedules
By having all of this information updated and on-hand, business owners can make planning and preparation less time-consuming. Ideally, your business accounting software will generate most of these financial records.
7. Send Out Required Information
Small business owners have to report certain information to the IRS. If you have employees, you’ll need to provide W-2 forms to each employee by the end of January, with copies sent to the IRS, state, and local tax authorities. Form 1099-MISC is required if you use independent contractors.
8. Request an Extension if You Need One
The tax filing and payment deadlines for most business types fall on either March 15 or April 15. If you don’t have time to complete a full and accurate return, request an extension.
You need to request an extension before the original due date of your tax return, and it is important to pay your taxes on time even if you’ve received an extension. The extension is only for filing the return.
9. Start Planning for Next Year
Tax planning should be a year-round process. Ideally, small business owners would review their income and expenses monthly and meet with their accountant quarterly to discuss how to take full advantage of the provisions, credits, and deductions that are available.
Planning ahead means you’ll be prepared to make smart business decisions that help minimize your tax liability and increase your profits. As one year ends it's critical to start the new one by having all of your financial records up to date, analyzing your profits and losses, and determining ways to keep your business profitable. Starting the new year with a thorough understanding of your financial situation puts you on the right track for a successful year.
Get Professional Tax Advice and Assistance
Running a small business is time-consuming, and one of the most complex parts of running a business is understanding your taxes. Unlike personal tax returns which can often be completed with a few forms once a year, business taxes are far more complex.
While tax planning and preparation can be time-consuming, investing the time and energy helps business owners make sound business decisions and avoid penalties and fees. If you're not comfortable working on your taxes alone, working with a CPA or other business tax professional is a sound business investment.
Nolan Accounting Center’s financial services make the life of small business owners easier. Rather than spending your free time worrying about tax filings, you can spend more time focused on growing your business and generating profits. Our bookkeeping and accounting services are designed to provide the financial information necessary to ensure your tax preparation is completed accurately and efficiently.
If you’re looking for a blend of personal service and expertise, Nolan Accounting Center is here to serve you. We provide accounting, tax preparation, bookkeeping, and payroll services to small business owners in Southeast Wisconsin. We look forward to working with you to meet your financial goals.