Every year, when the tax season arrives, it comes with a lot of stress and responsibilities, particularly for small business owners. From calculating taxes accurately to filing the tax form before the deadlines, everything is challenging. Moreover, a minor mistake can bring a business owner face severe penalties that result in heavy losses and impact the goodwill of the organization. Considering the importance of filing the taxes on time according to the latest tax laws is one of the utmost priorities. In this guide, we have explained all the tips related to tax deductions, deadlines, and filing.
Here, we have provided useful tips that will help small business owners file taxes accurately without any deductions.
Every year, there are new changes that are made to the taxation rules and laws. So, for accurate tax filing, it’s essential to ensure small business tax compliance standards. Also, you need to keep the below-given aspects in mind while filing taxes.
Maintaining the proper track record of expenses plays a crucial role in efficient tax planning. Therefore, it is best to access the accounting software for managing receipts, invoices, and expenses. The key deductibles might consist of:
Keeping the proper documentation will help in preparing for the audits and help maximize the deductions.
You can also take the advantage of the small business tax deductions and credits which are as follows.
The structure of your business, such as LLC, S-Corp, or Sole Proprietorship, may hamper your tax liability. In case there is any increase in your income, then you need to redesign to benefit from the lower business tax rates.
Another important tip is that it is necessary to generate a retirement plan, such as a SEP-IRA or SIMPLE IRA. As a result, it will let you reduce taxable income by keeping the financial data safe for the future.
The small businesses can prevent paying heavy tax penalties by staying on top of quarterly estimated taxes payment. For that, you must compute the projected income and then keep the funds aside to manage the tax obligations.
No matter how much DIY tax filing tools help is useful, a professional accountant can provide useful insight according to your business. Moreover, they also help the small businesses to:
Tax planning isn’t a one-time activity, so it is necessary for organizations to keep a check on it regularly. So, it is necessary for businesses to stay compliant with business changes like hiring employees or entering into new markets.
If you are making a small business tax filing for the first time, then you have to pay federal income taxes to the IRS. For that, you must consider some key factors in your mind.
While forming the small businesses, it is necessary to decide on a legal business structure. In short, the businesses have to decide which form of business they wish to create among the following:
The tax rate may vary according to the small business you form.
Another important point is that the small business owners must create a different bank account for the business. This is so because if you use your personal bank account for business purposes, it might be challenging. However, generating a separate business account will make it helpful:
Having year-end accounting reports will help businesses in identifying how much their company spent and earned throughout the year. For first-time users, it is essential to collect all the records related to income and expenses, including:
After having the clear insight regarding the business finances, it becomes easier to reduce your taxable income by claiming tax deductions.
Herein, we have explained the common business tax-deductible expenses and what you must track for your tax purposes:
The businesses dealing with tangible goods can make deductions up to a certain cost on every stage. Herein, you can monitor how much money you spend on purchasing inventory, producing goods, and bringing them back to customers. Above all, you can also count on the packaging materials as well as shipping supplies.
According to the IRS, you can deduct the vehicle expenses either by logging the miles or accessing the standard mileage deductions. Otherwise, you can match the actual expenses.
Herein, you can write off everything from market research to employee training and office supplies. Moreover, the IRS also makes the deductions on expenses, including legal fees, accounting services, and business licenses.
According to the IRS, it is suggested that small business owners must file taxes quarterly instead of annually. It is necessary because making the periodic payments will help in handling the cash flow statement more easily. Moreover, it also helps businesses to stay compliant with the tax deductions throughout the year.
Missing or delaying the IRS tax filing deadlines may result in heavy penalties and interest rates on the tax bill. Therefore, to ensure you don’t miss the due date of filing tax returns, consider the following points:
Regardless of all these, it becomes much more convenient to file the taxes on time if you have a complete list of expenses like payroll, healthcare premiums, and utilities.
Herein, we have described the tax deductions that a small business can claim from its overall income. So, let’s have a look at the tax deductions closely.
For instance, if you have rented the space for your office, then the rent payments, utilities, and office supplies are all covered under the business tax-deductible expenses. It may comprise:
Business trips are tax-deductible only if it is associated with business purposes. Eligible expenses that are covered under the deductions are:
The small business expenses also include mileage and associated expenses if you run a personal or office vehicle for office use. In that scenario, you can claim the tax deduction in two ways:
If your company has employees, wages, salaries, and other benefits that are tax-deductible. Then, it comprises the following:
Above all, the independent contractors are also covered under tax deductions. For that, you must verify that they must have a 1099-NEC when they are paid above $600 annually.
Also, if there is any professional service that is mandatory for running your business, it is covered under a tax deduction. It might comprise the following services:
Any investment made for business growth via marketing and advertising is fully deductible. It comprises the following costs:
Nowadays, there are numerous businesses that completely depend upon cloud-based accounting software and digital tools, which are tax-deductible. So, while choosing the software for small business tax preparation you can consider the below-given options:
Small business owners might also deduct contributions to retirement plans, such as:
If your company is providing any educational expenses to upgrade business skills, they are deductible. This might comprise:
In case you have taken any business loan, you can deduct:
For starting a new business, the deductions can be made up to $5,000 in startup expenses on line-items including:
In case you are engaged in a self-employed business and pay for your own health insurance, your premiums are deductible, including your family. However, some restrictions are imposed according to your state and the size of your business.
In case you are working from home, you are eligible for the home office deduction. This may apply to the following:
It is essential to safeguard your business, and insurance premiums are deductible. This includes:
For a better understanding of how LLC differs from corporate taxes, have a close look at the table illustrated below,
| Feature | Limited Liability Company (LLC) | C-Corporation |
| Taxation of Profits | The income and taxes are passed by the owners and reported on their individual tax returns. | The profits made are taxed at the corporate level and then at individual level when distributed in form of dividends and shareholders. |
| Tax Filing | The LLC won’t file a federal tax return on its own. On their behalf owners file a Scheduled K-1 and then report their share of income with individual tax returns. | Under this, the corporate files return is filed via Form 1120. |
| Losses | Business losses can be accessed to offset owners’ personal income in the same year. | Herein, the losses are deferred and can be accessed to offset future corporate profits, not owners’ personal income. |
| Liability For Owners | It provides limited liability for the owners. | Moreover, it also offers limited liability fr the owners. |
| Administrative Requirements | The users have to do less formalities. | It involves a lot of paperwork and regulatory compliance. |
| Ownership limits | It provides flexible ownerships. | You can share the ownership with the unlimited shareholders but with some restrictions. |
For filing the Limited Liability Company taxes, you must do the following:
The following are the instructions you must follow to file corporation taxes.
First step: Identify Whether Your Corporation is a C Corporation or an S Corporation
It is necessary to identify whether your corporation is a C corporation or an S corporation. Once you find out the corporation type, you can file an option to be taxed as an S corporation. It basically reflects that the tax obligations pass through the owner’s personal tax reporting.
Second Step: Find Out Your Tax Deductions for Write-Offs
Afterwards, you must find out the tax deductions you’ll be able to write off.
Third Step: Pay Your Estimated Taxes to the IRS
Next, you have to make an estimate of how much Tax you are supposed to pay on the net amount. If your business is a C-corporation, then you need to submit estimated tax payments four times a year to state and federal authorities.
Fourth Step: Filing of Federal Tax Returns By Its Due Date
Thereon, the C corporations utilize Form 1120 for filing the federal income taxes. An S corporation’s shareholders have to report their share of income from the corporation on Schedule K-1 linked with their personal tax returns.
C corporations should file their corporate taxes on the 15th day of the fourth month after the completion of the fiscal year. In short, it indicates that C corporations whose fiscal year ends on December 31st, the tax returns are to be filed by April 15. However, the corporation whose fiscal year end on 30th June has to file their tax return by the 15th Sept.
Fifth Step: Filing of the State Tax Returns By Their Due Dates
Herein, you are required to file a return for any state in which you are doing business.
Sixth Step: File Local Tax Returns By Due Dates
Moreover, the corporations are also liable to pay the taxes to the city, country, or regional jurisdiction. However, there are many local tax returns that are due on the same schedule as state taxes, but you also need to check them before filing.
Are you wondering how to prepare for a small business tax audit? Worry not, instead perform the steps below to stay organized and get ready to file the tax audit smoothly.
Firstly, the small businesses must be aware of what to expect throughout the audit. In short, the taxpayers must know about their rights and responsibilities for the audit.
Another important thing is to be prepared with all the essential financial documents, which include:
Moreover, the taxpayer must verify that the financial records are maintained properly, which reflects their business transactions. Herein, you need to reconcile your bank and credit card statements with your accounting records to find any discrepancies in your transactions.
Now, start looking for all the reported deductions and credits to ensure that proper documentation is maintained. Also, it is necessary that the tax deductions meet the IRS requirements.
If you are filing the tax audit for the first time, then you can take help from a tax expert with experience in audits. By connecting with them, you can obtain guidance and the best tips at the time of a tax audit.
It is crucial for small businesses to have an in-depth knowledge of the company’s financial status. You must be ready to give the explanation for your accounting records and show how you arrived at the figures reported on the tax return.
Thereon, it is mandatory that you keep the source of communication open with the auditor. It is necessary to stay professional and polite while interacting and responding to requests for information promptly.
Managing and keeping the tax audits organized can be a bit of a challenging task. But, it is mandatory to keep all the documents in a proper order and take timely follow-up on any information requests.
Without worrying about the outcome, you can also use the audit as a learning chance for improving the bookkeeping accounting practices. Thus, it ensures better compliance for the future.
It is important for small business owners to file the company’s taxes on time. In case a federal business tax is missed, then the IRS may charge heavy penalties. Therefore, it is important to file the taxes before the deadline to prevent heavy penalties.
If the tax deadline date falls on any weekend or holiday, then the date is automatically pushed back to the next business day. However, a state holiday generally pushes a deadline for filing a federal business tax return only when the IRS office where the company has to file is situated in that state.
The regular corporations, like C corporations, that work on a calendar year, their ITR for 2024 is due on April 15, 2025. Whereas, if your corporation works on a fiscal year, Form 1120 is due by the 15th day of the fourth month after the end of its tax year.
If you are a Self-Employed person running a business as a sole proprietorship, you have to file a separate tax return for your business. Personal income tax returns are due every year on April 15, 2025.
The federal income tax return an LLC files, and the due date for filing the return, depend upon the type of business entity you select.
If you fail to pay small business taxes, then the companies have to bear certain consequences. Herein, we have discussed all those repercussions in detail.
1. IRS Notices-
If the small business won’t be able to pay the taxes on time, then the IRS will send them a notice by mail along with the due date (i.e, between 30 and 60 days). Even after sending the notice, you won’t pay the taxes, which might result in additional penalties, fees, or a visit from the IRS to your place. Therefore, it is necessary to pay the amount within the due date. If you couldn’t make the payment in full, the IRS provides different options to apply for an online payment agreement or a compromise.
2. Late Penalties & Fees-
In case the companies fail to pay the taxes or do not pay the full amount, then the businesses might be subject to penalties. Failure to pay the penalties accrues at 0.5% monthly, while failure to file penalties accrue 5%. Moreover, an extra penalty of $135, along with an interest equal to the federal short-term rate plus an additional 3% also applies. In case the businesses pay late by one business week or less, they have to incur 2% penalty as per the latest tax bracket rules.
3. Interest Charges-
The IRS charges daily compound interest on the unpaid taxes, which begins from the due date, i.e, 8% for 2024. However, the interest rate will be charged until the full amount of taxes is paid to the IRS.
4. Additional Penalties For Fraud or Evasion-
In case the IRS detects wilful tax evasion, then the tax penalties might include a fine of up to $250,000. Also, criminal charges are filed against it.
Below are the stepwise instructions that will help you use a Small business tax calculator to compute the taxes accurately.
Before computing the small business tax rates, collect all the financial data, including profit and loss statements, expense receipts, and any other related documents.
You must make use of an official Income Tax India portal or a reputed fintech platform.
After this, the small business has to choose the financial year (2024-25) for which they wish to compute the taxes. Also, mention the business type, turnover, and the net profit.
Herein, you have to provide the details like business expenses, investment deductions such as (80C, 80D), and tax credits.
Furthermore, you will obtain an estimate of tax liability, surcharge, cess, and advance tax.
Finally, you must make the adjustments to the figures to simulate savings via different deductions.
Tax season might be stressful and challenging at the same time for businesses. But, by having the complete knowledge regarding the tax deductions and tax rates, it gets easier to file the small business tax. As a result, it also lets the businesses file the tax return on time without missing the deadlines. Furthermore, if you still require any additional help, then connect with our BooksMerge professionals for help.
