5 Steps for Income Tax Preparation
You took the first step— you created the business you have always dreamt about. You’ve hired employees, developed marketing, and have created your very own business model. Everything has gone according to plan and your business is making money. But with the newfound income, a certain idea starts to creep into your head—INCOME TAXES. After just starting your new business you’re left wondering, what do you need for income tax preparation? By using the following steps, you can establish what forms and information you’ll need for the upcoming tax season and be sure that your small business keeps smoothly sailing.
STEP 1: Types of Business Structures & Tax Forms
The first step is to establish how your business is structured so you can figure out which corresponding tax form you will have to file. Different business structures require different tax forms. For example, a sole proprietor business structure is where the business owner is the sole proprietor. As the sole proprietor, you are responsible for the business’s income. This business model requires a Schedule C tax form which you would attach to your personal income tax return (Form 1040).
To see which type of business needs which form, see the chart below.
|Business Structure||Tax Forms|
|Sole proprietorships||Schedule C|
|Single-member LLC||Schedule C|
|Partnerships||Form 1065 & Schedule K-1|
|Multi-Member LLCs||Form 1065 & Schedule K-1|
Your submission deadline for these forms is dependent on your business structure as well. Partnerships, Multi-member LLCs and S Corp businesses will be required to have filed their taxes by March 15th. While Sole proprietorships, Single-member LLCs, and Corporations that end their tax year on December 31st, are required to file by April 15th. After figuring out your business structure and the tax forms you will need, your next step is compiling all the information you will need to file your tax return.
STEP 2: Compiling and Examing Records
This is one of the most important steps for income tax preparation. Knowing what records, you will need and how to examine those records for necessary information, is crucial when filing out your tax forms.
First, you need to make sure you have your tax identification number. This is how the IRS will identify your business. In some instances, you may only need your social security number, but for the majority of business owners a Federal Employer Identification Number, also known as FEIN, is necessary.
The information you may need to fill out your appropriate form can vary from business to business. Most businesses will always need information from their balance sheet and income statements. This chart shows the type of information that will be listed on each record:
|Balance Sheet||Income Statement|
You could also need information to support these numbers such as:
- Bank Statements
- Bank Deposits
- Invoices received and paid
- Credit Card statements
Whether it be supplies for your business or your monthly rent, it is important to have documentation of your expenses. Once you’ve gathered all of these receipts and documents and have also deducted the necessary information, it’s time to look for tax deductions.
STEP 3: Tax Deductions & Tax Credits
As a small business owner, you never want to pay more taxes than you are required. Thankfully, you have the opportunity to earn a credit or deduction to lower your tax liability. In order to do this, you will always need the necessary information to support this. It’s important to also check the IRS guidelines and requirements for qualifying for a tax deduction or credit. Some things you might be qualified for are:
- Travel Expenses
- Home Office expenses
- Healthcare expenses
- Depreciating assets
- Employee benefits and pay
- Charitable contributions
It’s important to check that you have tried for every possible deduction or credit that could be available to your business, as long as you have the supporting documentation. Once you have checked for all possible tax deductions, and have assembled the supporting evidence, it is then time to see if you are going to be able to file your taxes by the IRS due date.
STEP 4: File for an Extension
This step may not be necessary. Maybe you were prepared and had everything ready to send off to the IRS and filed your taxes on time. However, it could have been your first year in business and you didn’t realize what taxes you were liable for, or maybe life just happened to interfere. Regardless, filing for an extension is available for business owners.
To file for an extension, fill out Form 7004 before your tax due date. This extension is for filing your documents— you still have to continue paying your estimated tax payments during this time. If you are unable to do so it could result in fines or other penalties including a tax levy. If you can’t do this, it’s important to reach out to the IRS to see what options are available. Lastly, once you’ve completed preparing for your income taxes, it’s time to speak to your accountant.
STEP 5: Speak to Your Accountant
You’ve reached the end of income tax preparation and it is now time to hand everything over to your accountant. Your accountant will then ensure that the information you have compiled is correct, as well as look for additional tax deductions or credits that you might have missed.
Ultimately, your accountant works for your business and wants to ensure you keep as much money as possible. Once they’ve checked for accuracy and all possible deductions, then it’s time to file away with peace of mind!
Trust Your Taxes to Eco-Tax
Preparing for taxes can be a lot of work that takes away from time spent growing your business, that why we at Eco-Tax are here to help you!
To offer the best client satisfaction, our experts at Eco-Tax remain:
- Economical: We offer affordable, transparent pricing. Gain access to key services, industry experts & the technology you need to keep your business thriving.
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- Eco-Friendly: Working virtually allows us to go paperless. All documents can be quickly shared through our secure portal, and you can meet your accountant online anytime.
To learn more about how we prepare for taxes, contact us today to book a free consultation with one of our trusted advisors. We look forward to partnering with you!