Tax season brings special challenges to small business owners, but with careful preparation and planning, tax time doesn't have to be too stressful. Here is an easy checklist to maximize your small business tax prep process.
Business Background Information
Here are a few general background items you'll want to locate and organize before you start filing your business tax return:
- Business name, address and contact information: Has your business location or mailing address changed during the past year? Now is a good chance to update it.
- Employer Identification Number (EIN): This is the tax ID number for your business, like a Social Security number for your company. Make sure you know your EIN. Tax time is also a good occasion to make sure your business entity (such as an LLC, S Corp, or C Corporation) is up to date on annual filings and in good standing with your state's Secretary of State or other business regulatory authorities.
- 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.)
Business and Personal Income
As part of filing your business tax return, you will need to account for all your business income. Depending on how you get paid by customers or clients, and other sources of business income, you might receive several different types of income forms at tax time, showing income that has been reported to the IRS. These include:
IRS 1099 forms: 1099 forms are also called “information returns," and are a typical way for small business income to get reported to the IRS. There are a few different types of 1099 forms that you might receive depending on your business and industry:
- 1099-NEC: Non-employee compensation that you might receive from professional services clients
- 1099-MISC: Miscellaneous payments, such as rent, royalties, prizes, and awards
- 1099-K: payments received from credit cards/debit cards, third-party networks, or payment apps
- 1099-INT: interest income from any interest-bearing bank accounts held by your business
W-2 form: If you pay yourself a salary as the owner of your business, you will need to include your personal W-2 form as part of your tax planning.
Deductible Business Expenses
Certain business expenses can be deducted from your taxable business income if the business expense is “ordinary" (common and accepted in your industry or field) and “necessary" (appropriate and helpful for your business). Track and compile your business expenses to get ready for tax time.
Here are a few of the most common categories of deductible business expenses:
- Employee salaries and wages: Do you have any employees (including your own W-2 salary income)? You can deduct their pay from your business income for tax purposes.
- Employee benefits: Money paid by your business for qualified employee benefit programs, such as health insurance plans, retirement plans or pension plans, and other fringe benefits, might be deductible.
- Contract labor: If you hire independent contractors or consultants to help with your business (and send them 1099 forms), you can deduct this compensation as a business expense.
- Business insurance: Many types of business insurance premiums are deductible, such as liability insurance, workers' compensation insurance, business interruption insurance, fire insurance, property insurance, and more.
- Business interest: Interest paid for business loans or business credit cards is often deductible.
- Advertising and marketing expenses
- Accounting fees
- Cell phone and internet
- Dues and subscriptions
- Office supplies
- Business equipment
- Business meals
- Rent payments
- Business travel
For more details about deductible business expenses, refer to IRS Publication 334, Tax Guide for Small Business, Chapter 8. Talk to a professional tax advisor if you have more questions about which of your business expenses are deductible, and how to handle this on your tax return.
