As a new business owner, nothing evokes feelings of trepidation and dread quite like filing a business tax return for the first time.
So, if you’re losing sleep during this, your first tax season, we don’t blame you. After all, the tax code is ever-evolving and complex. But there’s no need to panic.
We’ve broken down everything you need to know so you can file your first small business tax return with confidence. More importantly, you’ll have the leverage you’ll need to minimize your tax burden and maximize any potential refunds in your first year of business and beyond.
Organize Accounting Records for Streamlined Small Business Tax Filings
If you religiously track your daily business transactions from day one, you won’t find yourself scrambling to gather and tabulate your income and expense totals when tax season rolls around.
Not only will this save you time, but also tax preparation costs should you employ the services of an accountant.
And though only 2.5 percent of small business owners are audited, according to the IRS, it is a risk you face. So, should you receive the dreaded “Notice of Audit and Examination Schedule” letter, you can easily back up the figures reported on your tax return with complete and well-organized accounting records.
To get a better idea of what you’ll need when filing your taxes, let’s take a look at the list below.
- Gross receipts
- Checking and saving account interest
- Returns and allowances
- Sales records
- Unclassified income
- Employee wages
- Insurance premiums
- Professional fees
- Contractor payments
- Office/Home office rent
- Transportation and travel expenses
- Advertising cost
- Office supplies and equipment
- Phones and other communication devices
Get Clear on Your Tax Obligations
When submitting a tax return for your small business in its first year, knowing what IRS forms to file and what taxes you’re liable for can be confusing.
It all depends on what sort of business entity you have established. Some hold the owner personally responsible for company taxes, whereas others separate the business’s tax liabilities from the owner’s. And, each business structure requires a different IRS form.
We’ve broken these entities down, so you won’t face any surprises when filing a business tax return for the first time.
|Entity||Tax Liability||Required Forms|
|Sole Proprietor||A sole proprietorship is a single-owner business structure. The owner, called the sole proprietor, is considered the same legal entity as the business.||Income and self-employment taxes are filed with forms 1040-C and 1040-SE respectively.|
|Partnerships||A partnership has two or more owners. Like a sole proprietorship, a partnership is only taxed at the personal income level.||Form 1065 is used to report business income and expenses to the IRS. The company sends Form 1065 Schedule K-1 to each partner, showing each person’s share of income and losses. Partners then use Schedule K-1 to fill out their personal income tax returns.|
|Corporations||The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends.||Use Form 1120 to calculate and return the business’s federal income taxes, and to report the corporation’s income and expenses.|
|Limited Liability Company||A limited liability company (LLC) combines parts of corporations and partnerships. |
Like a corporation, an LLC and the owners are separate legal entities. And like a partnership, the owners have shared tax liabilities. Taxes pass through to the personal income level, so the business is not double-taxed.
|Depending on the way an LLC is set up, the company will file as a corporation, partnership or as part of an individual tax return.|
Estimated Taxes: How to Pay and When
If you expect to owe $1,000 or more in taxes ($500 if you are a corporation), then congratulations, your business is now required to file quarterly estimated tax payments.
Use Form 1040-ES if you are a sole proprietor, partner or S-corporation shareholder, or Form 1120-W if you are filing as a corporation. Be sure to calculate self-employment tax (if applicable) in this total.
So, how much do you have to pay in quarterly estimated small business taxes? As this is your first year of business, the answer to this question is not straightforward as you have no point of reference. A general rule of thumb is to set aside 30% of your total income. Using this method, you may end up overpaying your taxes owed. While this situation is not ideal, your small business will get back what you overpaid as tax refunds.
In addition to income, self-employment and estimated taxes, you may be liable for employment and excise taxes. For more information on these taxes, check out the requirements the IRS outlines.
Capture Every Deduction You’re Legally Entitled To
Now, let’s get to the fun part: deductions. One of the simplest ways to reduce your income tax bill is to ensure you’re claiming all the tax deductions available to your small business. Here’s where working with an accountant can really pay off.
With their guidance, you’ll steer clear of suspect deductions that may draw the scrutiny of the IRS while claiming write-offs you might have missed. And the best part is, your accounting fees are tax deductible.
Get Familiar with Lesser-Known Small Business Tax Deductions
Here are just a few examples of lesser-known deductions, that as a new business, you absolutely want to take advantage of:
- Home Office Deduction: As a new business owner, there’s a good chance you operate out of a home office. In fact according to the Global Entrepreneur Monitoring report, 69 percent of U.S. entrepreneurs start their businesses at home.In this case, you may be eligible to deduct a portion of your home-related expenses, including mortgage interest, property taxes, homeowner’s insurance and some utilities.
- Start-up Costs: I don’t have to tell you that starting a new business venture is costly. But there are certain tax advantages that can help you offset this financial burden.You can deduct up to $5,000 of the startup costs you incurred before you began operations in your first year. Examples include advertisements, salary and wages for employees and instructors involved in training, costs associated with market analysis and travel expenses incurred while securing customers, suppliers or distributors.What’s more, you can claim up to $5,000 in organization costs, including legal fees, state fees and travel fees for organizational meetings.While these deductions can be helpful, taking the maximum deduction in your first year may not be the most sensible move. Best tax practice is to take bigger deductions in the years you have the most profits to minimize the taxes you owe. If you operate a business making little or no profit, you’ll probably want to skip the first-year payout and spread the deduction over more profitable years.
- Interest Payments: If you have a small business loan or are making payments against a business line of credit, you might be surprised to learn that the interest paid is a deductible business expense.
Don’t Let Tax Filing Deadlines Sneak up on You
As we covered, there’s a lot that goes into preparing for tax season. It’s best to start the process early to ensure deadlines do not come and go because of unforeseen complications—such as a lack of cash flow.
If you can’t pay your taxes in full, don’t use that as an excuse to delay filing. Failure-to-file penalties are generally more than failure-to-pay penalties. Bottom line, should you find yourself with a high tax bill that your available cash flow simply won’t cover, explore other payment options such as a business loan to protect yourself against additional interest and hefty penalties.
There’s no question that filing small business taxes for the first time is an intimidating task, but with the right organization and preparation, you’ll find yourself on the other side of April 15th unscathed. And remember, you don’t have to go at it alone. A small business accountant can help you navigate the tax filing process. Good luck!