Small business tax time doesn't have to feel overwhelming and stressful if you know what to expect and do a little prep in advance.
To ready yourself for your 2022 tax year filing, start by preparing for the big day, finding out what's new for tax year 2022, and following these foundational strategies.
First, the Tax Logistics
Tax day procedures can look very different depending on your type of business. The first step is knowing which tax forms you'll need in order to file your business taxes.
If you're a sole proprietor, for example, you will file your business taxes as part of your personal taxes. That means you will have to complete a Schedule C along with Form 1040.
S Corporations and partnerships will use Form 1120-S and a Schedule K-1.
Different business types also have different filing deadlines as well. It's important to follow these deadlines since missing one could result in paying interest and penalties.
- For Sole proprietorship, C-corp, single LLCs: File or request an extension by April 18; file with an extension by October 16.
- For Partnerships, S-corps, etc., multi-member LLCs: File or request an extension by March 15; file with an extension by September 15.
- Financial statements: Profit and loss reports or other financial statements to record your business income. Whether you use accounting software like QuickBooks or FreshBooks, or track your business income manually on a spreadsheet, you need to have a source of truth to show how much revenue your business made during the prior tax year.
- Estimated taxes paid: Keep track of how much tax you have already paid during the previous tax year. This might include quarterly or monthly tax withholdings from your salary, additional estimated tax payments, or both. (If your business is a pass-through entity like an LLC, the business does not pay taxes – your tax obligations are handled on your personal tax return.)
Lastly, you'll need to make a key decision: Will you file your own taxes, or will you hire a tax preparer? Depending on how complex your business is, it might be a good idea to enlist the help of a tax accounting professional. They will be knowledgeable about any tax changes and credits for which you may be eligible, as well as any relevant state tax laws.
Whether or not you are going to seek help, there is still a good amount of work you'll need to do to get your tax documents in order.
Start Gathering Your Business Income Records
Regardless if you're filing yourself or enlisting the help of an accountant, you need to have your business financials available for reference. Among the files you need include accounting journals, ledgers, balance sheets, income statement, bank statements, etc.
You'll also need to file with your Social Security number or EIN (Employer Identification Number), so be sure to have that handy.
Prep Documentation for Business Expenses
Small businesses can deduct a number of expenses, including operational costs, supplies, insurance, and professional services (marketing, advertising, attorneys, accountants, etc.).
If you use a home office, you may also be able to deduct part of the cost of running your home. Other potential expenses could be for mileage, transportation, meals, entertainment, health insurance, professional development, etc.
You'll need to have a paper or digital backup for every expense you claim, whether it's a collection of receipts, paid invoices, credit card statements, or other proof. For home office deductions, you'll need to know how much you paid in property taxes, insurance, and utilities, as well as the square footage of your home office and entire house.
If you paid estimated quarterly taxes for the year, you or your accountant will need proof of those payments as well.
Lastly, make sure you've sent the necessary forms to your employees (W-2) and contractors you hired (1099-NEC) by the required dates, and have your payroll records ready to access.
Tip: If you're not already tracking your expenses as you go, establishing a way to do that will help you moving forward.
Brush Up on Your Tax Credits
Tax credits can help small businesses offset some of their tax liability. Most of them incentivize SMBs to invest in something that benefits their employees or their community. Here are some examples of tax credits you may be eligible for:
- The Credit for Small Employer Pension Plan Startup Costs is for SMBs with 50 employees or less that started up a retirement plan during this tax year. The tax credit is 100% of the cost (up to $5,000), as well as up to $1,000 in contributions you made per employee.
- Other potential credits include Disabled Access Credit (if you made accessibility improvements), Work Opportunity Credit (for hiring targeted groups like veterans or formerly incarcerated individuals), Paid Family and Medical Leave Credit, etc.
- Check out some of the other small business tax breaks listed by the IRS.
Don't Forget State and City Tax Obligations
State tax laws vary. For example, some may have their own credits and rebates for small businesses on top of what the federal government offers.
Research your state's department of finance or speak with a tax professional who can guide you.
What's New for Tax Year 2022?
Though there are no major changes this year as we saw in 2017 or during the pandemic, there are still a couple of items that may impact small businesses.
- Most COVID rules have expired for this year, like the Employee Retention Credit (which allowed businesses to offset their payroll tax liabilities during the pandemic).
- For 2022, if you're claiming mileage expenses, you'll have a little extra number-crunching to do since the cost of each mile of business use from January 1, 2022, to June 30, 2022, is 58.5 cents per mile, but 62.5 cents per mile from July 1, 2022, to December 31, 2022.
- For this year, business meals are 100% deductible (in certain circumstances).
Tip: Try not to mix personal and business dealings. Although delayed for the 2022 tax season, if you are paid more than $600 using cash apps like Venmo in 2023, you will receive a 1099K from the company, which will also be sent to the IRS. (The current threshold is $20,000.) All of your income will be taxable just as it's always been, but what is worth noting is that the 1099K amount might include personal transactions or gifts, so you'll need to tally up which portion you'll need to pay taxes on.
Get a Head Start on 2023 Taxes
Recordkeeping is so important, so if you're struggling to get your taxes done this year, it's a good reminder to put practices in place ASAP to simplify your life come this time next year. You might decide to choose a more intuitive business accounting software, outsource some of your financial bookkeeping, or just commit to being more organized.
Other than that, keep watch for any news about changing tax rules, dollar-limit increases or decreases on existing rules, and other IRS announcements that could impact you.
