Small Business Tips

Tips on Filing Your Small Business Taxes for the First Time

Justine Rabideau

So you finally realized your dream of starting your own business and becoming your own boss. Congratulations! While there are many wonderful things about owning a small business, it does make filing taxes a lot more complicated. You may be nervous about filing small business taxes for the first time.

Here are some tips to help the process go more smoothly.

1. Don’t be afraid to ask for help

Filing business taxes is very different from filing individual taxes. Different rules apply, and you require different tax forms, probably in greater quantities than you’ve ever used before. The tax system is not easy or intuitive for most people to understand.

Accountants spend years learning the IRS’ rules and regulations to help people prepare their taxes. Taking advantage of their expertise may help you to avoid costly mistakes.

If you’re concerned about the expense of hiring an accountant, don’t worry. You can actually deduct fees you pay to an accountant to help you prepare your taxes. This means that hiring an accountant may actually save you money.

Like doctors, lawyers, and many other professionals, accountants may specialize in particular areas. Take the time to shop around and find an accountant who knows how to file taxes for small business.

2. Be sure to use the correct forms

Now that you’re a small business owner, you’ll need to file new business taxes. That means using different forms that you’ve probably never even heard of. While the forms may be unfamiliar to you, it’s important to understand that they are not interchangeable. The form(s) you need depends upon the structure of your business:

  • Sole Proprietorship: You need to fill out Schedule SE for your self-employment taxes and Schedule C for business profit/loss.
  • Single-Member LLC: Like a sole proprietorship, you need to fill out Schedule C. Unlike a sole proprietorship, you do not need to fill out Schedule SE.
  • Corporation: You need to fill out Form 1120, the corporate tax return.
  • S-Corporation: An S-corporation is different from a corporation. Form 1120-S different from the corporate income tax form.
  • Partnership/Multi-Member LLC: You need to fill out a Form 1065 for the business, and each partner/member needs a completed Schedule K-1.
coffee shop owner checks his bookkeeping folder on the counter of his busy coffee shop

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3. Separate personal and business expenses

This can be very difficult to do if you’re a sole proprietor conducting business out of your home. Nevertheless, it is essential because the IRS has strict rules about not using personal expenses as business deductions. For example, say you use your car for both personal and business purposes. You need to keep an accurate log of your business uses of the vehicle.

The same principle applies to your finances. To keep business spending separate from your personal finances, consider opening a separate checking account. You do not necessarily need a business account; a separate personal account will suffice.

4. Take advantage of deductions

It is to your advantage to minimize your taxable income. Doing so lowers your tax penalty and puts more money back into your business. However, there are right and wrong ways to do this. Illegal activities like tax evasion and fraud are obviously the wrong ways. The right ways include taking advantages of the many tax deductions available to small business owners.  

The most obvious deductions are your business-related expenses. Fortunately, this is a very broad category. Any expenses related to your business are deductible if they are necessary, ordinary, and for a reasonable amount. Deductible business expenses can include the following items (and more):  

  • Banking fees
  • Costs of advertising
  • Software purchases
  • Business asset depreciation

Some of the other small business deductions are easy to overlook, but doing so can be costly.

  • Mileage Deduction: This is the reason it’s so important to keep track of business use of your personal vehicle. You can deduct the miles you drive for business at a rate of 58 cents per mile in 2019.
  • Health Insurance: If you provide coverage for your employees, you can deduct this expense. Conversely, you can also receive a self-employed health insurance deduction under certain conditions. This applies to your family as well as yourself.  
  • Self-Employment Tax: When you’re self-employed, you must pay the Medicare and social security taxes that an employer would otherwise pay for you. Fortunately, 50 percent of your self-employment taxes are deductible.

5. Understand startup expense deductions

Many small business deductions apply every time you file small business taxes. However, there are special first-time small business tax deductions that you can only take advantage of this year. They involve your startup expenses or the money that you spent to get going before opening your business.

Deductible startup expenses may include the following:

  • Investigating how to create a successful business
  • Accounting/legal fees
  • Licenses and permits
  • Advertising your business opening
  • Training employees
  • Equipment purchase or rental

As always, restrictions and guidelines apply. During the first year you are in business, you can deduct up to $5,000 of your startup costs. If your startup costs exceed this, you can deduct the remainder over the next 15 years, dividing the amount equally per year.

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