Tax Questions All Entrepreneurs Ask Their First Two Years in Business
The thought of filing taxes as an entrepreneur may immediately make you feel anxious, especially during your first couple of years in business. However, one of the best ways to banish your nerves is to get trustworthy answers to the most common questions. Here are details about six queries you’re most likely to have as an entrepreneur in the early stages of your company.
1. What Can I Deduct as Business Expenses?
Entrepreneurs frequently want to know what qualifies as a business expense. A crucial thing to keep in mind is that if you only use something for business purposes part of the time, it’s not a qualifying deduction. For example, if you work out of your home and buy a kitchen table that doubles as a desk, it’s not a valid expense.
Also, there are other cases where you can only deduct a portion of business expenses. One instance concerns business gifts given to customers or clients. There’s a $25 deduction limit unless you give branded presents that cost $4 or less and distribute them widely. Then, you can deduct up to the full cost of those.
There are also lots of lesser-known items and services that qualify for business deductions. For example, subscriptions to trade magazines, memberships to professional organizations and the laundry services to wash staff uniforms or other items used in business operations qualify.
Perhaps there are several expenses where you aren’t sure if they meet the write-off requirements. If so, it’s best to ask your accounting professional. That person can assess your situation and give you their informed opinion. In any case, ensure that you have the receipts for all business expenses that get written off.
2. Which Forms Do I File, and When?
Anyone who has ever looked at the Internal Revenue Service (IRS) website knows that there is an overwhelming number of forms to sort through. What’s more, the titles are often not descriptive enough to confirm if a document applies to you.
The main thing to keep in mind is that the form you submit for tax purposes depends on the business structure you have. Additionally, there are different due dates for each type. Use the list below as a guide for the forms to submit and their associated deadlines:
- Sole proprietorships or single-member LLCs: Schedule C, filed with your personal tax return. When reporting business income on a personal return, also fill out Schedule SE to calculate self-employment tax. — Due April 15 unless the Texas winter storms affected your business. In that case, you have until June 15.
- Partnerships or multiple-member LLCs: Form 1065, plus Schedule K-1 for each partner or LLC member — Due March 15
- Corporations: Form 1120 — Due four-and-a-half months after the end of the corporation’s fiscal year or April 15 if the business follows a tax year that ends on December 31.
- S-Corporations: Form 1120-S — Due March 15
If you get in a bind and need a filing extension, the IRS offers them. However, that extra time only applies to your filing date and not any payments due. The steps to follow and the time lengths of each extension vary — again, based on your business type. A tax professional can help ensure you follow the correct process if you require more time to file.
3. Which Tax Year Should I Choose?
A businesses’ tax year is the period for which you pay taxes and keep records. You choose your company’s tax year when filing taxes with the IRS for the first time.
Most entrepreneurs follow the calendar tax year (January 1-December 31). It’s likely the best choice if you don’t have special accounting requirements. The IRS sometimes requires businesses to abide by the calendar year if they don’t have frequent reporting requirements or other less-common circumstances.
However, another option is to follow the fiscal tax year. Select it if you want your year to last 12 months, but wrap up at the end of any month other than December. A fiscal year typically happens at the end of every quarter. It may be the most appropriate schedule to follow if you have a seasonal business where most activity occurs during a certain period. In such a case, the fiscal year makes it easier to track how your business performed.
Finally, there’s a so-called short tax year. As you might guess from the name, it lasts less than 12 months. The most likely reason you might use it is if you start your business in the middle of the year. Additionally, you can get permission from the IRS to change your tax year after initially choosing it. Switching it is another instance where you would follow the short tax year until transitioning to the new schedule.
4. Do I Need To Make Quarterly Tax Payments?
If you worked in a conventional job before starting your business, you can probably recall looking at your payslip and seeing taxes automatically taken out of the check. However, things are different when you run a business, and you may need to pay taxes every quarter.
The specifics depend on your business structure. For example, corporations must submit taxes as they earn. Moreover, if you’re a sole-proprietor, it’s smart to put aside money for self-employment taxes. That way, you won’t have costly surprises that come by your taxes and see that you owe a substantial amount.
If you’re a sole proprietor, partner or S-corporation shareholder, you may need to pay taxes every quarter. Then, you do so on April 15, June 15, September 15 and January 15. The dates are the same every year. However, if they fall on a weekend or holiday, the due date shifts to the next business day.
The general rule is that people should submit quarterly payments if they anticipate owing at least $1,000 when filing their tax returns. The figure drops to $500 for corporations. Paying what you owe is relatively straightforward. You can send a check or use one of several sites mentioned by the IRS on its website that accept credit and debit card payments on behalf of the government organization.
5. Which Documents Should I Keep for Tax Purposes?
Filing taxes for your business becomes much more manageable if you know which documents to save and put them all together for easy reference. It also helps to maintain a system where you convert each document into a digital format as soon as you receive it.
Don’t count on the relevant providers to maintain the records for you. For example, many banks let you retrieve statements going back many years, but you’ll lose that access when closing the account.
Here’s a general list of things to retain for tax reasons:
- Information about loans
- Correspondence from the IRS
- Bank statements
- Previously filed tax returns
- Checks and deposit information
- Confirmations for e-filed tax returns
Beyond holding onto those documents, ensure you can find them quickly when needed. It’ll undoubtedly be a frustrating experience if you purchased some computer equipment this year and can’t find the receipt
6. How Can I Avoid Getting Audited?
The thought of an IRS audit could make any entrepreneur feel anxious. The IRS will reportedly increase its small business audit rate by 50% in 2021. However, that’s still not a reason to get upset and start thinking the worst. That’s because the IRS audited a historically tiny percentage of small businesses before its planned increase. So, even with the jump, your likelihood of getting selected for an audit remains relatively low.
Plus, there are some simple things you can do to cut your audit risk:
- Keep accurate and thorough records
- Don’t estimate deduction amounts or round them
- Hire a professional who knows recent tax law changes
- Stay on top of any applicable estimated tax payments
- Avoid taking excessive deductions
- Provide supporting documentation to explain drastic changes since last year
Another crucial detail is that some audits occur randomly. The IRS uses algorithms that help it select taxpayers to check, and some of those cases have red flags, but others don’t. Getting audited doesn’t necessarily mean you did something wrong or that the IRS suspects you of tax fraud. An audit is merely a second look at the paperwork you filed.
Many scammers take advantage of tax season and contact people by phone to pose as the IRS and claim the people called got selected for audits. However, the IRS will never call you. Representatives contact taxpayers by mail. If you get an audit letter, it’ll describe what you need to do next and the time limit associated with that request.
Information Helps You Feel Prepared
There’s no reason to automatically feel nervous about filing your taxes during the first two years in business. Give yourself plenty of time to get informed with answers like those you’ve just read. Additionally, know when your best solution might be to hire a professional tax specialist. That person can look at your specific situation and give you personalized advice.
In closing, good record keeping can help you stay level-headed before and when tax time rolls around. When you can immediately access the necessary documents, it’s just a matter of recording the relevant information on your tax paperwork.
Eleanor Hecks is editor-in-chief at Designerly Magazine. Eleanor was the creative director and occasional blog writer at a prominent digital marketing agency before becoming her own boss in 2018. She lives in Philadelphia with her husband and dog, Bear.
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