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