5 Tax Preparation Basics For Small Business Owners
New legislations constantly impact how small business owners file taxes. In the recent time, the changes in the tax code have given small businesses more flexibility financially. However, with many of the changes in the code, the tax preparation basics are more important that ever. As a small business owner, you need to learn how to properly prepare for tax season before the deadline hits. Those who do not file their taxes correctly put themselves in bad standing with the IRS. Avoid dealing with government issues that keep you from operating your business. In this post, you will learn the top tax preparation basics for small business.
Separating Business And Personal Expenses
One of the main tax preparation basics for small business is separating business and personal expenses. The IRS does not approve of business owners who mix their personal expenses into their business expenses. Many business owners assume that adding their personal expenses into their company’s tax records will reduce the burden of taxation and improve their financial stability on both ends. Those who proceed to make the addition often receive negative notices from the IRS. When they identify personal expenses within business taxes, they look into the business owner’s personal accounts. If they dislike what they find, they take action to recoup their taxes. Follow this tax preparation basic to minimize your personal and business financial issues.
Small business owners need to determine their deductions as well. This tax preparation basic applies to all small business owners. Limited liability owners, sole proprietors and S Corp founders alike receive tax deductions annually. Some of the most popular deductions include printer paper, cell phones and food. While expenses such as printer paper are straight forward, many business owners struggle with deducting food. This is because there are specific regulations. If you have an office full of employees and purchase lunch for the entire office, the expense is deductible. However, lunch for just you when you are in the office alone cannot be deducted. Look into the specifications of each regulation to ensure that you prepare your taxes correctly.
Choosing The Right Form
Another tax preparation basic for small business is choosing the right form. IRS forms vary per business entity type. A corporation owner needs a different form than a sole proprietor. Sole proprietorship business owners use Schedule C attachment forms to list their income and expenses. Limited liability company owners can use the LLC form or the Schedule C as well. Corporations, on the other hand, need to use corporate tax returns. Since the required forms vary, it is crucial for business owners to work with a tax or financial professional to determine which ones they need to properly file their taxes.
Reporting Your Accounting Method
Moreover, the top tax preparation basics include reporting your accounting method. Most business owners choose between Cash and Accrual because they are the most popular options. Often times, small businesses will use the cash reporting method. However, some business owners mix the two options together to create a method of their own. Particular business entity types also permit other accounting methods. If you do not want to use Cash or Accrual, speak with your financial advisor about your small business tax preparation. Inquire about your new options under the tax law. Then, you can guarantee an effective process.
Confirming Employee Data
In addition to the above tax preparation basics for small business, you need to confirm employee data before submitting your taxes to the IRS. Review each employee’s information that you have on file. Read over their employee records and compensation. Informative documents on compensation can be used to prevent dealing with disputes during tax season. Upon getting hired, full-time employees, part-time employees and contractors all sign agreements that state how they will receive compensation. Have these files handy when preparing your taxes so that you can issue W-2s or 1099s accordingly.
Business owners use tax preparation basics to guarantee that they file their taxes correctly. To avoid running into problems with the IRS, always keep your business and personal expenses separate from one another. Secondly, select the right form based on your business entity type to file properly. Then, determine your deductions by reviewing rules and regulations. Business owners typically use Cash or Accrual accounting methods and notify the IRS of the type that they used. Finally, look over and confirm each employee’s data regarding compensation. Use these tax preparation basics for small business to file your taxes efficiently.