Preparing for Tax Season: Essential Tips
for Business Owners

Business taxes are pretty simple.

You start a business, register for tax with the IRS, your state, and, depending on your location, the local revenue department.

Earn a gross income, subtract your variable and fixed costs, determine your net profit, calculate your small business tax, subtract relevant deductions, and file a timely return.

So, in reality, filing taxes for a small business can be stress-free, but only when you make preparation part of your daily bookkeeping routine!

Follow these small business tax tips and make preparing for the tax season a breeze.

Why preparing business taxes in advance for tax season is key

Many businesses need a tax accountant to file payroll and annual income taxes.

My Pop was one of those accountants.

His pet hate was business owners arriving with a box full of invoices and receipts (in no particular order) days before a filing date and expecting him to meet the deadline and avoid an audit.

Sure, he always did, but he charged accordingly!

Cost is one reason you should make preparing for tax season part of your monthly routine; others are to ensure you avail of tax deductions and avoid an audit!

The good news is that, depending on your business structure and size, you can prepare your taxes or invest in user-friendly (often free) accounting software to track your income and expenses.

Here are several more reasons why getting a head start on your taxes is crucial:

With business taxes, preparation is how you get those early bird deductions, stay tax law savvy, meet your obligations, reduce stress, and achieve financial stability and success. 

Next, let’s look at some proven bookkeeping strategies that will help you be ready for the tax season:

List of tips to survive and thrive in tax season

You know preparation is crucial to your tax return success. But if you’re new to running a business and bookkeeping duties, you might be thinking, how do I prepare?

And it’s a brilliant question.

Fortunately, it’s pretty simple, and the more you prepare, the easier it becomes.

You can maintain your financial records using accounting software, excel, or a paper spreadsheet, depending on your preference. Your approach doesn’t matter as long as it tracks your income and expenses and lets you determine your gross and net profits. 

Keep accurate records:

Keeping your records organized is the secret sauce for filing taxes for a small business.

Whether it’s folders, digital apps, or old-school binders, sort, label, and date your documents. It’s not just a time-saver; it’s a guard against costly errors and missed deductions and helps you glide through tax season with confidence.

Classify your business:

Choosing the proper business structure for your startup can help avoid unnecessary tax costs. 

Whether you’re considering an S Corporation, Limited Liability Partnership, Limited Liability Company, Single Member LLC, or Sole Proprietorship, each choice has its tax implications. 

You can read about the specifics of each type, but it’s also wise to speak with a tax accountant to choose the correct entity for your business. 

Separate business from personal expenses:

You should avoid mixing your business and personal expenses for two reasons.

  1. Have you heard of the term “Breaking the corporate veil“? It’s when a formal structure (like an LLC or S corp) commingles personal and business expenses and can cause the owner’s loss of liability protection. 
  2. If the IRS looks at your business expenses and notices they mix with your personal, they might look at those, too!

When learning how to file small business taxes, having a separate bank account and credit card for your business dealings not only simplifies your bookkeeping but can also help improve your business credit score and reduce the cost of getting a business loan.  

Understand the difference between net and gross income:

You might think this is obvious, but it’s one reason many businesses go bust before year 5.

It’s not uncommon for new entrepreneurs to look at their gross sale price (total before deductions) and think of profit, but it’s not that simple. You must think net (total after deductions) because if your costs exceed your selling price, you’re on a one-way street to losses, no matter how many units you sell. 

See how your ability to accommodate market fluctuations decreases and how a simple increase in raw materials, shipping, utilities, or local taxes could turn your profit into a net loss.

Itemize business expenses:

Every accountant will tell you the devil’s in the details, especially regarding business expenses.

Here’s where you must itemize and categorize your business expenses well before tax day to ensure your claims are legitimate and maximize your deductions.

Talk with an accountant (or your in-house bookkeeper if you have one) to learn more about what you can and cannot itemize as a business expense. 

Bonus tip:

The neater your info, the fatter your wallet because an organized approach saves time and trims down your tax preparation bill.

Calculate projected payroll taxes:

Filing at least quarterly (or even more frequent payroll taxes) is standard for most business employers. 

The result for small businesses often means their payroll tax duties outweigh their income taxes, and if they neglect their payroll tax deposits, hefty penalties await.

So, SMBs with employees should get familiar with payroll taxes, factor them into their business budget, and make them center stage in their planning.

Numerous small business tax calculators can assist you in this role. 

Quarterly business taxes:

You pay estimated quarterly taxes as a small business owner or self-employed individual. As those taxes are not automatically withheld from your wage (like with W-2 employment), it can be a surprise! 

You can avoid unexpected bills or penalties from the IRS by knowing your obligations with quarterly estimated taxes, like what they are, how you calculate them, and when you pay them.

Quarterly tax filing dates:

Which time of year is best to start business tax wise?

Choosing the right time of year to start your business is vital, as it can result in extra tax benefits and financial stability.

But the date isn’t a one-size-fits-all answer. 

Your business registration date depends on your unique circumstances and goals; let’s look at your options and how they can benefit your business:

Traditional tax season:

Tax season (when businesses and individuals receive their tax forms and file returns for the previous year with the IRS) runs between January 1 and April 15 of each calendar year. 

A tax year (known as a fiscal or financial year) is a 12-month accounting period a business uses to record its income and expenses and report its taxes. 

You choose your business season based on your entity type, business tax year, and whether you need filing extensions. 

Okay, now your options.

The beginning of the calendar year:

Starting your business in January simplifies your tax duties as it syncs your business’s fiscal year (your 12-month accounting period) with the IRS standard tax year (January 1 to December 31). 

Besides starting afresh on New Year’s Day, you also get a full year to 

track your business income and expenses and income, enabling you to create an easy-to-follow monthly bookkeeping record, and that’s key to tax compliance!

Late in the calendar year:

Starting your business later in the calendar year—let’s say October or November—gives the IRS less to consider in your fiscal year, and a shorter fiscal year could be financially helpful to your startup.

For example, the less taxable income you earn, the less tax you’ll pay, meaning you can offset your startup and running expenses in your inaugural year against your initial tax bill. 

It’s not just a late start; it’s a strategic tax advantage!

Match your business taxes with your business cycle:

Another approach to your tax season is matching it with your business’ peak seasons.

For instance, if your primary income revolves around holiday/seasonal sales, starting in the months leading up to the holiday season means you’ll ride the wave of immediate demand and maximize those available deductions when you need them most. 

Consult with a tax professional:

In the intricate world of taxes, the best time to start your business depends on your goals, niche nuances (like seasonal demand), and, of course, the wisdom of professionals. 

An experienced tax accountant can offer guidance on the optimal timing.  From entity structures to crafting a tax strategy, your accountant can tailor a tax strategy, enabling your business to avail of certain deductions when needed most.

Speaking of deductions, let’s see what might be available for your business:

Business tax deductions

The first rule of tax deductions is the IRS never talks about tax deductions!

Okay, that’s not entirely true, but if you want to get tax deductions, it’s your (or your accountant’s) responsibility to know what they are and how to apply.

Business tax deductions range from a percentage of your home office utility bills to educational courses and business trips. 

Sure, it might seem complicated, but the more you know about tax deductions and credits, the less tax you’ll pay. And deductions and credits aren’t just for tax specialists; the IRS provides straightforward information on what’s available and to which business types.

But before you jump ship, here are some standard deductions to kick-start your deduction journey:

Deductions and credits can significantly reduce your taxable income and lower your overall tax liability; the more you know about them, the greater the savings. 

To get deductions, you must keep precise records and consult a tax professional to ensure you take full advantage of what’s available while remaining compliant with tax laws.

Do you need an accountant for your business taxes?

The answer depends on your business structure (like a sole proprietorship, LLC, or S corporation), complexity, and business tax knowledge.

Let’s look at why:

The takeaway:

Going solo is an option, but accountants bring valuable expertise, time-saving prowess, and the potential to reduce tax liability. 

So, when deciding whether to hire an accountant for your business, remember it’s not just about filing taxes; it’s about reducing them! 

Tax season FAQs

How much of small business income goes to taxes?

On average, small businesses pay around 20-30% of their income to the taxman. 

But your tax bill can vary depending on your business entity, location, income level, and which deductions you use, like a pension plan.

Do I need to file taxes for my small business?

Yes, all businesses (except partnerships who file an information return) must file a yearly business income tax return to the IRS. You might also need to file business taxes with your state, county, and city. Check out our “How to Start a Business” (in your state) posts to learn more.

How often do I need to file business taxes?

Annually, however, most businesses also file quarterly estimated taxes, and those with employees also file payroll taxes.  

Can I file my business taxes on my own?

It depends on your business structure, complexity, and tax knowledge. For example, a sole proprietor who provides a local service could file their taxes, while a complex multi-member LLC could benefit from the experience of an experienced accountant. 

What tax deductions can I claim for my small business?

Deductions range from startup and running costs, including equipment, office supplies, travel, and advertising. 

But as it’s your responsibility to claim deductions, hiring a tax professional when starting your business is advisable. 

What’s the deadline for filing business taxes?

Your tax deadline depends on your business structure and when you register it, but it’s April 15 for most entrepreneurs.

How do I choose the correct business entity for tax purposes?

The answer depends on several factors, like your chosen niche, marketplace, investment needs, and location.

But before choosing, research what each business entity offers and how they can benefit you on your entrepreneurial journey.

Are there penalties for late or incorrect tax filings?

Yes, these include late filing penalties and interest on unpaid taxes; however, extensions are available. 

What records should I keep for tax purposes?

Keep every invoice, receipt, and financial statement because the better your bookkeeping is, the more you can save come tax season. 

Can I deduct home office expenses for my business?

If you use part of your home to run your business, you can claim a percentage of its running costs, including rent or mortgage repayments, electricity and heating bills, Wi-Fi, etc. 

Do I need to pay estimated taxes for my business?

Most businesses pay quarterly estimated taxes to cover Medicare and Social Insurance. Read the IRS information page or consult a tax professional to learn more. 

What’s the difference between a tax deduction and a tax credit?

Tax deductions reduce your taxable income, while tax credits reduce your tax liability. Credits are the heavy hitters, offering a dollar-for-dollar cut in the taxes you owe.

Can I amend a filed business tax return?

You can file an amended return using the appropriate form to remove mistakes.

Conclusion

“Taxes, death, and childbirth, there’s never a convenient time for any of them!”

– Author Margaret Mitchell.

But they don`t have to be painful because the more you prepare, the more you can save on taxes.

And the sooner you start your business’ bookkeeping, the easier the process will be.

This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.

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