In the midst of all the other requirements of a new business, gathering information and learning how to get ready for small business taxes is just one more important task. The sooner you start thinking about business taxes, the more you will be able to save on tax preparation and to keep your tax bill low.
How to Start
Resolve at the beginning of your business to keep good business records. Recording all business transactions, even the smallest petty cash payments, is the basis for your tax preparation.
Start by setting up a system to capture, record, and preserve information on business income and expenses.
Part of your financial system should be two important reports. both of which should be part of your accounting software or from your accountant:
- An Income Statement (Profit and Loss statement) showing business income and expenses monthly, with year-to-date totals.
- A Balance Sheet, showing the financial status of your business at the end of each month, quarter, and year.
Capturing all business expenses is most important, because expenses not captured cannot be deducted from your business income. In particular, you will need at-the-time information on
so you can deduct these expenses from your taxes.
A business tax advisor is a key member of your support team. As soon as you can, find a tax advisor who can review your financial situation monthly and quarterly and who can help you begin to prepare for business tax season before the end of your first year.
Apply for an Employer ID Number (EIN). Most businesses will need this number (even if the business doesn't have employees), and applying for this identifier will be necessary for many financial transactions, as well as for business taxes.
Keep records of your EIN and other documents related to your business legal situation, including your application for state registration of your business legal type.
Review business tax changes for the current year so you know what kinds of activities you might want to include in your tax return
Understanding your Business Tax Return
Sometime soon after your start a business, spend some time reviewing the documents you will need to file for your business taxes. Even if you have a tax preparer do your business tax return, you should know how it all fits together and what information you will need to provide.
You will need to know your business type so you know which business tax return to file. Review this article about how business types pay business taxes so you will know how to file your business tax return.
Most small businesses file a Schedule C to report business income and expenses. Schedule C is filed along with the business owner's personal tax return. Review and understand Schedule C, noting the information required.
Within Schedule C, for businesses with products, is the calculation of Cost of Goods Sold. If your business buys products for resale or manufactures products, understanding Cost of Goods Sold can help you prepare for this calculation.
As you look at your business tax documents, be sure to include Schedule SE, the calculation for self-employment tax. Business owners are required to pay Social Security and Medicare tax based on the profits of their business. If you are self-employed, you will need to complete this form and include the tax amount on your personal income taxes.
Finally, take a minute to review this article explaining how your business taxes are included in your personal tax return.
Preparing Your First Business Tax Return
Before the end of your first year in business, meet with your tax advisor to discuss your P&L and Balance sheet and make any end-of-year decisions that might help lower your tax bill.
After the end of the year, gather all the information you will need for Schedule C and Schedule SE and take these to your tax preparer. Include:
- A final year-end copy of your P&L and balance sheet
- Business information, including your EIN, business type, and address
- Year-end inventory numbers, if you will need to do a Cost of Goods Sold calculation
- Information on income sources, and any returns or allowances
- Information on all expenses, including details on mileage, meals, and entertainment expenses
Your tax preparer will walk you through a checklist to make sure you don't forget anything.
If you use tax software, use the walk-through and make a list of all the items you will need, then gather them to complete your return. If you have kept good records during the year, this part should not be difficult.
Some additional information:
- How to save money on business tax return preparation
- A Guide to Small Business Taxes, including information needed for Schedule C, how to file an extension or amend your return, and more.