How to File Federal Income Taxes For Small Businesses
Running a small business can be an incredibly rewarding experience. But come tax season, business owners face their own unique set of stresses and challenges.
That’s where we come in. Boxelder’s team of CPAs and licensed tax professionals boasts decades of experience helping small businesses file their returns and minimize their tax bills. We can work with you to:
- Conduct a comprehensive assessment of your business tax structure, exposure, and liabilities
- Develop a customized tax “game plan” by determining the best possible entity structure for your business,
- Anticipate and adjust to changes in tax laws, and
- Properly file your business tax returns.
In other words, let us handle the boring stuff, so you can get back to what you do best — running your business.
In the meantime, our guide to tax preparation for small businesses provides a brief overview of what to expect as tax season nears.
Types of Business Entities
When starting a business, you’ll need to decide what sort of entity you want to operate as. This is an important decision, as your choice will play a factor not only in your personal liability for the business’s activities, but also in how taxes are imposed on the business and yourself as the owner. The most common forms of business are:
- Sole Proprietorships – Subject to income tax at the individual level; subject to the self-employment tax
- Partnerships – Similar to a Sole Prop, but with two or more owners
- C Corporations – Earnings are taxed at the corporate level and shareholders pay tax on dividends. In other words, earnings are taxed twice.
- S Corporations – No corporate-level taxation. Any distribution of income to the shareholders is only taxed at the individual level.
You can also choose to operate your businesses as a limited liability company (LLC). The IRS will, by default, treat an LLC as either a sole-proprietorship or partnership, depending upon the number of owners. Alternatively, you can choose to have your LLC be taxed as a C corporation or S corporation.
Each type of business entity comes with its own set of advantages and drawbacks. Be sure to consult with a tax professional to determine which is best for you.
Gather Your Records
Perhaps the most important thing you can do throughout the year to make doing your taxes easier? Keep detailed records. Before filling out any tax form, you should gather all of your records and receipts that report your business earnings and expenses. Be sure to download our Small Business Tax Prep Checklist for a more detailed list of records.
Not only is good record-keeping required in order to prove income and expenses reported on your small business’s tax return, but they also are crucial for monitoring the progress of your business over time. Quality records can help you to interpret whether your business is improving, determine which items are selling best, and decide what changes you need to make.
At Boxelder, we utilize top-notch accounting software that will simplify the record-keeping process for you.
Prepare All Necessary Documents
Now that you have all of your records, it’s time to determine which form to use to file your taxes. While every business needs to report earnings to the IRS and pay tax on them, the form you use to do so will depend on what entity your business operates as (see above).
- Sole Proprietorship — As a sole proprietor, you are the business; the business itself is not taxed separately. You can report all of your business income and expenses on a Schedule C attachment, which you file with your personal income tax return (Form 1040).
- Partnership — File Form 1065. Partnerships don’t pay tax; instead, they pass net income, income tax credits, and other tax items through to each of the partners. Each partner receives a Schedule K-1 that reports their share of items to report on their tax return. When you receive a Schedule K-1, you report partnership tax items on Schedule E of your Form 1040.
- C Corporation — File Form 1120. This is separate from your personal income tax return. The corporation reports any dividends or other tax information that applies to you on the applicable 1099.
- S Corporation — File Form 1120-S to report the corporation’s income, gains, losses, deductions, and credits. As with a partnership, any profit or loss “passes through” to its shareholders via Schedule K-1 (Form 1120-S).
Schedule C is fairly straightforward. It’s only two pages long and lists all of the expenses you can claim. When done, you simply subtract your expenses from your business earnings to arrive at your net profit or loss. Then, transfer this number to your personal income tax form and include it with all other personal income tax items.
Form 1120 is a little more involved than a Schedule C. It asks for more information, and you must provide balance sheet data for the beginning and end of the tax period. The biggest disadvantage of filing a Form 1120 is that it exists separate from your personal income tax return.
Be sure to visit our Small Business Tax Deductions page to ensure you’re making use of all available options for reducing your tax bill.
Be Aware of Deadlines and Estimated Payments
Don’t forget that for some business entities, the annual deadlines differ from what you might be used to as an individual.
If you are taxed as an S-Corp, for instance, you must file Form 1120-S by the 15th day of the third month following the close of the tax year. For most taxpayers, this is March 15 — a month earlier than the April 15 deadline you’re likely acquainted with. You cannot send this form to the IRS with your personal income tax return.
On the other hand, if you use a Schedule C, it becomes part of your Form 1040 and therefore, no separate filing deadlines apply.
Visit our Tax Deadlines page for a more detailed breakdown of dates to keep in mind.
Another major misstep many new business owners make when starting out is failing to properly plan for their end-of-year tax bill. This often poses a problem for individuals leaving work as an employee, where they were used to their income tax being withheld by their employer.
In order to avoid making this mistake, you should pay estimated taxes to the IRS if you expect to owe $1,000 or more for the year ($500 if you operate as a corporation). Not only will paying your small business taxes through estimated payments help you avoid IRS penalties, but they will keep you from being blindsided by an unexpectedly hefty tax bill.
If this is overwhelming, worry not — Boxelder’s team of CPAs and tax professionals is the best around. Let us handle your tax preparation, so you can get back to running your business.