Updated: Sep 16, 2018
Taxes are a part of everyone’s responsibility at the beginning of the year. Making sense of small business tax forms and deductions can be complex and time-consuming. If filing your own business income taxes this year, heed the following advice.
Keep Good Records
Always remember to separate personal and business expenses. Intermingling your personal and business bank accounts can be a big cause of confusion around tax time, making it more difficult than it already is. Be sure to keep accurate records throughout the year to distinguish between personal/business expenses. Save receipts or attach them to transactions in QuickBooks Online to retain them for tax time or (knock on wood) an IRS audit. The IRS recommends keeping receipts, mileage logs, and other expense records for at least 7 years.
Taxes and Legal Structure
Business income tax filing forms and deadlines are dependent on the legal structure of the small business. Small business legal structures in the U.S. include sole proprietorships, partnerships, limited liability companies, and s-corporations.
A sole proprietorship is the default business type if no other business type is registered with a state. A sole proprietorship pays income taxes through the owner's personal tax return.
A partnership is registered with the state and consists of several partners. The partnership files an information tax return on Form 1065 and individual partners receive a Schedule K-1 showing their share of the partnership's profits or losses. Schedule K-1 income or loss is included along with the partner's other income on his or her Form 1040.
A limited liability company (LLC) is not a taxing form for federal income tax purposes. A single-member (only one person) LLC pays income taxes as a sole proprietorship. A multi-person LLC (at least two members) is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.
S-corporations elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S-corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.
For more information regarding business legal structures, visit the IRS website here. March 15th, 2017 is the deadline for partnerships and s-corporations. Tax filings are due for all other entities on April 18th, 2017. (April 15th is a Saturday, and Monday, April 17th, is a holiday in the District of Columbia). If you need more time, file an extension with the IRS before the respective deadline.
Small Business Deductions
If you have a home office, you can deduct expenses related to the business use of your home. This includes a percentage of phone, office supplies, equipment, internet, and utility bills. In order to qualify for the home office deduction, you need to have a dedicated space in the house that is used solely for business and nothing else (and have proof of that fact). Small business owners can deduct 100% of travel costs if the primary purpose of the trip is for business. Do you travel for business to meet with potential clients or attend conferences? If so, you can deduct business travel related expenses like hotel stays, meals, airfare, car rentals and personal mileage. The standard mileage rate for 2016 was $0.54/mile and will be $0.53/mile in 2017.
Did you buy any books or take an online business course? Are you involved in an industry organization? Some other potentially deductible business expenses include those incurred for professional dues, training/development, retirement, personal health insurance, and interest on credit to finance business purchases.
If your deductible expenses are a lot higher this year than last or not considered typical for your industry/business type, the IRS may get suspicious. Tax laws can be complex and change from year to year. An accountant can help ensure you don’t overdo or exaggerate your deductions. We always recommend meeting with a certified tax professional like a CPA or enrolled agent before filing income taxes for your small business.
To summarize, optimize your business tax savings by keeping accurate records, identifying deduction opportunities, and meeting with a certified tax professional before filing taxes for your small business.