If you are a small business owner and it’s time to file your tax return for the first time, you might be feeling a little overwhelmed. But don’t panic—we’ve got you covered. Fortunately, the process of filing taxes for the first time is not as scary as it seems. To help you get through filing your small business taxes, we’ve put together an overview of what you will need to know.
Identify the Type of Business You Have
The first step in filing your business taxes for the first time is to determine just what type of business you have. It’s important that you identify which category best fits your company so that you know what forms and schedules to file with your return.
The most common business structure is a sole proprietorship. This type of business is owned by one person and is not taxed separately from the owner’s personal income. In other words, everything you make in your business goes directly into your pocket and your business income is taxed as part of your personal income. You will need to file for self-employment tax under this category.
A partnership is an unincorporated business owned by two or more people who share profits and losses. All partners have equal ownership rights, share in management duties, and participate in profit-sharing decisions.
A corporation is a legal entity that has its own tax return. Since it’s a separate entity from its owners, the corporate tax rate is higher than that of an individual. However, this business structure does have some benefits. For instance, corporations can deduct many expenses on their business tax return.
Limited Liability Company (LLC)
An LLC is similar to a corporation in that it’s a legal entity separate from its owners (called members). The difference between an LLC and a corporation is that LLCs have fewer restrictions on how they are taxed and can be managed by one member or several.
Steps to Filing Small Business Taxes
If you are new to filing small business taxes, you may be unsure about the steps involved. Here are the basics on filing small business taxes for the first time.
Which Forms Do You Need to File & When
Get organized when you are filing taxes for the first time. Once you know what type of business structure your company has, you can determine which forms you need to file for your business taxes. There are several different forms that are required for filing small business taxes, but there are two main ones that you will need to complete: Schedule C and Form 1040.
Schedule C is used for sole proprietorships to file for self-employment tax. While Form 1040 is used for partnerships, LLCs, and corporations. Both forms have similar information requirements, but have different formats so be sure to use the correct one!
If you are unsure about which forms your business needs to file when it comes time for federal income taxes, ask your accountant or visit the IRS website for more information.
Filing for the first time can be a long process. So, when do you need to file your small business taxes? The answer depends on whether you are an individual or an LLC, partnership, or corporation. If you are filing as an individual, then generally you have until April 15th. If you are filing as an LLC, then the deadline is typically March 15th.
Track Income & Expenses
The IRS requires all businesses to keep detailed records of their income and expenses. This includes revenue from sales, as well as any money paid out for expenses like rent or supplies.
You can use an accounting software program like QuickBooks or FreshBooks to keep track of these numbers each month and understand your estimated taxes. These programs also have helpful reports that can help you analyze your spending patterns so you can make changes if necessary.
Take Eligible Business Deductions
You will have to pay income tax, but you might be able to deduct some things from your taxable income. For example, if you paid for advertising or office supplies in the course of running your business, those expenses can be deducted from your taxable income when filing your annual return.
Gather the Proper Tax Filing Documents
As you prepare to file your small business taxes for the first time, gather all your documentation related to last year’s business expenses, including invoices, payment slips, receipts and any other documents showing how much money was spent on supplies, travel, and other costs associated with your business operation.
Make sure you have copies of everything related to your income as well, such as pay stubs from employees who worked for you during the year.
Maximize Your Deductions On Your Small Business Taxes
One of the best ways to reduce your taxable income is by maximizing your deductions—that is, taking advantage of all the tax breaks available to you.
But how do you know what deductions are right for your small business? Here are some of the most common deductions small businesses can take advantage of:
Auto expenses are extremely common among new small business owners. If you use your car for business trips and errands, then you should be able to deduct some of those costs from your taxes. Keep track of mileage and total up any parking fees or tolls on your way to and from work every day. You may also be able to deduct some auto maintenance costs—though keep in mind that repairs made strictly for personal use will not qualify for this deduction.
Home Office Expenses
If you use part of your home for business purposes, you can deduct a portion of your mortgage interest, utilities (like gas, electricity, cable), repairs, and maintenance costs associated with using your home for business purposes.
If you travel for business, whether it’s to visit clients or attend industry events, you can deduct those costs. You will need to keep track of all travel-related expenses and receipts, but it could add up to big savings at tax time.
Business Start-up Costs
Start-up costs are expenses related to getting your company up and running. For example, if you have purchased furniture or equipment specifically for use in your office space, those expenses qualify as start-up costs. You can also deduct any fees associated with registering a domain name or website address as well as legal fees related to incorporating your business if necessary.
If you paid for office supplies out of pocket and used them for business purposes, you can deduct those costs. These include pens, paper clips, printer ink cartridges, and other similar items. Office equipment like computers and cell phones are also deductible if they were used exclusively for business purposes.
Meals & Entertainment
You can deduct 50% of the cost of business meals and entertainment if they are directly related to business activity. For example, if you are entertaining clients or employees at a restaurant, it could qualify as a deductible expense as long as it is not purely social in nature and there is some sort of business purpose for having it—such as discussing new advertising strategies or marketing plans.
If you purchase equipment for your business, you may be able to deduct its cost over several years through depreciation. You will need to keep track of how much you paid for your equipment and when it was purchased so that you can calculate the deduction accordingly.
If you provide benefits such as health insurance or life insurance to your employees (or yourself), those costs are tax-deductible as well.
If you use the internet for work purposes, the cost of internet access at home or in a hotel room during business travel can be deducted as long as it’s solely for business purposes.
Work-related Education Expenses
If you are looking to improve your skill set by taking classes or attending conferences, look into whether or not those costs may be eligible for deduction. It’s a good way to save some money on taxes without having to sacrifice valuable learning opportunities!
If you are new to filing taxes for your small business, or if you have been doing it for years but never really knew what all those numbers meant, now is a great time to check in on how much you can save by taking advantage of these deductions.
If you are not sure whether certain expenses qualify for deductions or if there are other ways to lower your tax bill, talk with a professional about making adjustments to maximize your deductions and savings. A CPA or accountant can help determine whether certain expenses are eligible for write-offs.
The Bottom Line On Your Business Taxes
Taxes can be scary, especially if you are a new small business owner. By planning ahead, determining your needs, and educating yourself on the fundamentals of small business taxes, you will be able to fill out your taxes correctly, and file away those worries!