Business Taxes: The 411
It is almost that time of year again, tax season. While tax season is rarely a joy for anyone, if you have only ever filed personal taxes as an employee, the first time you file business taxes may be challenging. Self-employed small business owners who are new to business taxes may find themselves dragging their feet when it comes time to file. The Reason: they may not know where to start. Filing taxes is inevitable, so being ahead of the curve can make all the difference during your first tax season. As a new small business owner, take a moment to consider our business tax prep checklist.
Hiring a CPA, EA or Accountant
There is certainly no formal requirement that you utilize the services of an outside CPA, EA, or other accounting professional to help with your business records, but having this level of assistance is great advice. Picking the right professional to help may be more complicated than making that decision in the first place. Ask for a referral from people that you already know and trust. Ask your friends, your coworkers, your clients, even some of your competitors whom they use. If you can find a professional that is already trusted by someone you trust, you will be way ahead of the game. Talk to several professionals if you can. Ask about fees and timing and related experience with other businesses similar to yours. The required knowledge base for accounting and taxation and other detail is NOT rocket science so the most important factor is finding a professional that fits with your personality and make sure you listen to your gut instincts. Also, if things don’t feel right as you move through your first few years, do not hesitate to consider a change.
Maintaining Organized Business Records
From a tax return standpoint, the most important part of maintaining organized business records is to make sure that you do not miss any eligible deductions to which you are entitled. Failure to capture all financial transactions in whatever accounting system that you utilize can only lead to paying more in federal income tax than you are required to pay. In addition, if you have well organized and comprehensive records to support your tax return, any questions that may come up later will be easy to answer. The IRS can ask for more information related to your tax return for up to three years from the date you actually file the return. The more diligent you are in maintaining your accounting records today the less stress that potential review will cause years later.
Knowing the Difference between Gross and Net Incomes
The definition of Gross income and Net income may be a bit tricky in managing your current cash flow and the money you need to set aside for Uncle Sam. However, not knowing the difference can lead to over estimating the amount you pay in estimated tax payments during the year and even the amount you might owe on April 15th. Your business’ gross income is the total money that it receives in exchange for goods sold and/or services provided and generally equals the total amount you have received from customers during the year. This amount is certainly very important but does not dictate the amount you should set aside or to pay in taxes on a quarterly basis. The well-maintained accounting records mentioned above will show that you incurred many expenses in order to bill and collect that gross income from your customers. Those items may include the cost of materials to make your product, the cost of wages for your employees, office supplies, utilities, telephone bills, and many other items. Subtracting all of those qualified business expenses from your gross income will yield your net income. The tax rates that you will be subjected to will apply only to your net income and not to your gross income. Your quarterly estimated tax payments and indeed the total amount of your tax liability will be based on net income, AFTER considering ALL of the deductible expenses that you have incurred.
Claiming All of Your Business’ Income
It is very important to make sure that you are including ALL of the income generated in your small business. This includes money that you received for goods sold or services provided but also will include barter income. Barter income is basically the exchange of one product or service for another. If you provide consulting services for which you would typically charge $100 in exchange for, say, cabinet repair at your home, that $100 should be included as gross income in the same manner as if you had received the cash. In addition, regardless of how you are paid, the money is gross income. That includes check, credit cards, on-line transfers, Venmo, PayPal, and even small amounts of cash. Don’t be creative in what you include as gross income. Intentional failure to include income can be considered fraud so always, ALWAYS make sure you include all income you have earned.
Keeping Expenses Separate
As a new small business owner, it can be very difficult to keep personal transactions separate from business transactions. It is a great idea to make sure all items are clearly delineated between the two. Make sure you consider opening a completely separate bank account for the new business activity. Consider having a separate credit card that is used solely for business. From the day you open those new accounts always do your best to keep all of the business activity completely separate from any personal activity. At the end of the year, all of your business activity will be captured in one place, namely your business bank account. If the IRS ever asks you for more detail, they will be interested in your “business bank account”. If you can provide bank statements that only include qualified business expenses, with no payments for personal items, your IRS inquires will be much easier.
Correctly Classifying your Business and Knowing Your Filing Deadline
The appropriate IRS tax form required for your business and the ultimate due date of that return will depend on the classification of your business. So, the ultimate due date for your business tax return may not be the date that you expect and may certainly not be April 18th. The four tax classifications recognized by the IRS, along with the relevant due dates and tax forms are as follows:
- Sole proprietorship April 18thSchedule C
- Partnership March 15thForm 1065
- Corporation April 18thForm 1120
- S Corporation March 15th Form 1120S
Partnerships and S Corporations must file earlier than individuals, sole proprietors and C Corporations since many of those entity owners will need detailed information from those partnerships and S Corporation. So, if your small business is organized as a partnership or as an S Corporation, remember that your return is due on March 15th and not on April 15th.
If your small business is organized as an LLC, or Limited Liability Company, you will have an extra complication. The LLC form of organization is not a recognized entity form in the eyes of the IRS, so you must elect how you will be taxed. If you are a single member LLC, you can either be taxed as a sole proprietorship or as a corporation. Most new small businesses choose to be taxed as a sole proprietorship. If this is your case, then your tax return will be due on April 18th If there is more than one owner in your LLC, a multi-member LLC, then you will choose to be taxed either as a partnership or as a corporation. In both cases your tax return will be due on March 15th.
Managing Payroll
Managing your small business payroll can be a daunting task and may well be the area of most scrutiny from governmental entities including the IRS and the Social Security Administration. Payroll compliance includes, in most cases, quarterly payroll tax return filing and monthly or even bi-weekly remittance of payroll tax liabilities. The best news related to payroll management is that there are hundreds of companies and professionals who can provide ideal compliance with all federal and state requirements for a very reasonable price. Before you spend too much time trying to manage your own small business payroll, consider outsourcing this function. If you choose to do this “in-house” make sure you bookmark the IRS website at IRS.gov and the NASE website at NASE.org and don’t hesitate to ask questions.
Filing an Extension Request for More Time
You may find it difficult to complete your tax return by its specific due date for many reasons. The good news is that the IRS provides an automatic extension of time to file your return, and you don’t even have to say why. The automatic extension is requested by filing IRS Form, 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return for sole proprietorships, or IRS Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns for Partnerships and Corporations. You can download these forms directly from the IRS website at IRS.gov and the completed form must be postmarked by the original due date of the return. Remember that the extension is ONLY an extension of time to file your tax return and NOT an extension of time to pay any tax that will be due. If you expect to owe tax, do a quick estimate of what you think you might owe and send a check with your extension request.
How Do I Learn More?
To learn more about preparing for tax season, contact the experts at NASE. Our licensed professionals will be happy to answer any questions you have.
New Faces in Support of Small Business
The 118th Congress is officially underway, both the Senate and House have finally finished organizing themselves, this includes appointing members to committees. As it relates to small business policy and oversight, we have some new faces leading and joining the committees of importance.
Senate Small Business and Entrepreneurship Committee
The Senate committee will continue to be chaired by Senator Ben Cardin (D-MD); who has led the committee for six years, playing a crucial role in the Covid-19 relief efforts that supported the small business and self-employed communities. Per his stated focus, “Senator Cardin’s top priority as Chair is to use federal policies and congressional action to achieve equity for under-served entrepreneurs in a holistic way.”
The Republicans have chosen Senator Joni Ernst (R-IA) to serve as ranking member, following the contentious leadership of Senator Rand Paul (R-KY) who served as ranking member for four years. Senator Ernst, whose partners were small business owners, is the first female combat veteran elected to serve in the United States Senate.
The committee members largely remain the same, the Republicans have extended a seat to incoming Freshman Senator, Ted Budd (R-NC).
House Small Business Committee
With the flip in the House, the Republicans have assumed the chairmanship of the House Small Business Committee, placing Congressman Roger Williams (R-TX) atop the committee. A small business owner for nearly 50 years, running a family-owned car dealership and calf-cow operation, makes him uniquely suited to serve and lead the committee.
Former Chair of the Committee, Rep. Nydia Velázquez, assumes the ranking member position on the committee. She has served on the committee since her election to the House in 1992.
As we approach the 2025 expiration of the Tax Cuts and Jobs Act (TCJA) provisions, the tax committees in both the House and Senate will continue to be the epicenter of action.
Tax Committees
The Senate Finance Committee will continue to be led by Senator Ron Wyden (D-OR) and Senator Mike Crapo (R-ID). In the House, the Ways and Means Committee is being led by new Chairman Jason Smith (R-MO) who ascended to the committee leadership following the successful tenure of Rep. Kevin Brady (R-TX) who retired at the end of the 117th Congress. Rep. Richard Neal (D-MA) maintains his leadership role as the ranking member.
Most of the activity we will see around small business policy will be generated by these four committees. We will continue to provide timely updates and analysis of tax proposals and legislation as the 118th Congress jumps into its work.