TABLE OF CONTENTS
- Organize Your Records Before Filing a Small Business Tax Return
- Get Clear on Your Tax Obligations
- Estimated Taxes: How to Pay and When
- Capture Every Deduction You’re Legally Entitled To
- Don’t Let Tax Filing Deadlines Sneak Up on You
- Get Set to File Your New Business Taxes
As a new business owner, nothing evokes feelings of fear and dread quite like filing a business tax return for the first time.
If that’s your situation, you might have questions about how to file, and you might even be asking yourself, “Can a small business get a tax refund?”
While the tax code is ever-evolving and complex, 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. Learn how to minimize your tax burden and determine if you’re eligible for any small business tax refunds in your first year.
Organize Your Records Before Filing a Small Business Tax Return
When you’re filing small business taxes for the first time, it’s important to organize your accounting records.
If you’ve been tracking your daily business transactions from day one, great news: You won’t find yourself scrambling to calculate your income and expenses 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.
Although less than 1% of taxpayers are audited, according to the Internal Revenue Service (IRS), it’s a risk you face.
Should the IRS send you a notice that you’re going to be audited, you can easily back up the figures reported on your tax return with complete and well-organized accounting records.
Documents to Have at the Ready
To get a better idea of what you’ll need when filing your small business taxes for the first time, gather the following:
- Gross receipts
- Checking and savings account interest
- Returns and allowances
- Sales records
- Unclassified income
- Employee wages
- Insurance premiums
- Professional fees
- Contractor payments
- Office rent
- Transportation and travel expenses
- Advertising costs
- Office supplies and equipment
- Telephones 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. 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 down these entities 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, Schedule C and 1040, Schedule SE respectively.|
|Partnerships||A partnership has 2 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||A corporation’s profit is taxed to the corporation when it’s earned. After which it’s 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
Once you began earning money as a small business owner, you should have started paying quarterly estimated taxes if you expected to owe the IRS $1,000 or more ($500 for corporations).
Sole proprietors, partners and S-corporation shareholders use Form 1040-ES to submit estimated taxes. Corporations use Form 1120-W.
So, how much should you have paid in quarterly estimated small business taxes? Since this is your first year of business, the answer to this question isn’t straightforward because you’ve had no point of reference.
A rule of thumb is to set aside 30-40% of your income. You might be thinking that’s a lot of money, and perhaps you’re wondering, “Do small businesses get tax refunds for overpayment?”
Well, while putting aside at least 30% of your income could lead to slight overpayment, the IRS will give you a small-business tax refund for your first year of filing if you’ve paid too much in estimated taxes.
In addition to income, self-employment and estimated taxes, you might be liable for employment and excise taxes. For more information on these taxes, check out the requirements the IRS outlines on its website.
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 pay off.
With their guidance, you’ll steer clear of suspect deductions that could 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.
Small Business Taxes: What You Need to Know for 2021
What tax changes have come about due to the coronavirus pandemic? Find out more about what you’re able to deduct and tax credits you could be able to take advantage of.
Get Familiar with Lesser-Known Small Business Tax Deductions
Here are some examples of lesser-known deductions, that as a new business, you absolutely want to take advantage of:
As a new business owner, there’s a good chance you operate out of a home office. In fact, according to 2018 data from the U.S. Small Business Administration, about half of all businesses are home-based.
If you have a dedicated home office that you regularly use only for your business and your home office is your principal place of business, you’re eligible to deduct a portion of your home-related expenses. These could include mortgage interest, homeowner’s insurance, repairs, utilities and depreciation.
Alternately, you could use the simplified method to calculate this deduction, and you’d be able to deduct $5 per square foot for business use of your home, up to $1,500.
Starting a new business venture is costly. But certain tax advantages can help you offset this financial burden.
If your startup costs were $50,000 or less, in your first year of operation, you can deduct up to $5,000 of those costs. The deduction is reduced for every dollar of costs greater than $50,000 up to $55,000. For example, if your costs before launching were $54,500, you’d be able to deduct $500 the first year ($5,000 – $4,500).
However, after $55,000, you won’t be able to take any deductions in the first year, and you’ll need to amortize them instead, claiming the remaining costs as deductions of equal proportions over the course of 180 months, starting with the month your business opened.
Examples of startup costs include:
- Salary and wages for employees and instructors involved in training
- Costs associated with market analysis
- 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 deductions may be helpful when you’re filing small business taxes for the first time, taking the maximum deduction in your first year may not be the most sensible move.
Consider taking 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 deduction and spread it out over more profitable years instead.
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 often a deductible business expense.
For the 2020 tax year, business interest expense deductions can be 50% of the business’s adjusted taxable income, up from 30%.
Don’t Let Tax Filing Deadlines Sneak Up on You
As we covered, there’s a lot that goes into preparing for tax season, so be sure to understand what you need to know about small business taxes and deadlines. It’s best to start the process early to ensure you don’t miss due dates because of unforeseen complications — such as a lack of cash flow.
If you can’t pay your new business taxes in full, don’t use that as an excuse to delay filing. The penalty for failing to file is generally higher than it is for failing to pay.
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.
Get Set to File Your New Business Taxes
There’s no question: Filing small business taxes for the first time is an intimidating task. But with the right organization and preparation, you can submit your first filing unscathed.
Remember, you don’t have to go at it alone. A small business accountant can help you navigate the tax filing process and calculate your business tax refund if applicable.