How to File Your Business Taxes

As a business owner, regardless of your company’s size or industry, you’ll have to file federal, state, and local taxes each year. Tax season can feel overwhelming when you have a mountain of other tasks to juggle on a daily basis. Knowing how and when to file your taxes can ease the burdens associated with the tax season. This way, the process won’t feel so cumbersome. Not to mention that you’ll also ensure compliance with tax laws, avoiding costly penalties and fees.

All commercial businesses will pay taxes. However, the specific types of taxes and how businesses are required to pay them will vary according to their chosen business structure. As you prepare to handle this vital task, you’ll want to know the correct procedures for filing taxes, empowering you to focus on what’s most important to you — running and growing your company. Let’s look at the important steps you’ll need when compiling and filing your company’s taxes.

Choose an Accounting Method

There are two primary ways you can do this for bookkeeping: cash or accrual-based accounting. The cash basis of accounting is when your revenues and expenses are recognized at the time any cash is received or paid out. Accrual-based accounting works a little differently in that transactions are recorded and recognized in the fiscal year they occurred; this approach does not take into account when the actual cash is received or disbursed.

Sole proprietorships, partnerships, LLCs, and some corporations can opt to use either accounting method unless they carry inventory. In the case they have inventory, the accrual accounting method must be utilized. Larger companies may be required to also use accrual-based methods if they generate a certain level of revenue. Check with your accountant to determine which reporting method is best for your company.

Select a Bookkeeping Method

Your bookkeeping system is the software, tool, or program you utilize to organize your business transactions as you record them. Businesses use one or more of the following:

● Manual processes using ledgers and/or journals

● Spreadsheet reporting using Excel, Google Sheets, or another similar program

● Cloud-based software, such as Quickbooks, Xero, Sage, or a similar program

Whatever you choose, you’ll want to select a method that makes sense for your business, is cost-effective, and promotes accuracy.

Obtain Your Federal Tax ID Number

Almost anyone who owns a business must — or should — obtain an employer identification number (EIN). Often referred to as a tax ID number, the EIN is a unique identifier for your business. To apply for your EIN, follow these steps:

● Assemble contact details about your company, including legal name, DBA (“doing business as”) name, and business address.

● List the person responsible for the business.

● Include the taxpayer ID of the responsible person (this may be a Social Security Number or an Individual Tax Identification Number).

● List your business structure, and in the application, note whether your company is an LLC.

● Select a reason for needing an EIN.

● Estimate the number of employees you currently have or plan to hire.

You’ll need an employer identification number to hire and pay employees, open a business bank account, file taxes, and more.

Identify Your Write-off Expense

The business expenses you are legally allowed to write off on your taxes will vary, depending upon the type and scope of your company. However, there are several tax write-offs most companies can take.

Be sure to give all your business’s documentation to your tax preparer. Your preparer can then evaluate the eligibility of any write-offs you’ve listed. If you’re taking the DIY tax preparation route, be sure your expenses are suitable for write-offs to offset taxable income. The following are typically qualifying write-off expenses businesses can take.

  • Startup expenses. You can deduct up to $5,000 if spent on market research, advertising expenses, training, travel costs, and wages for consultants. Your business must have succeeded to qualify for this write-off. A failed business cannot claim this deduction.
  • Employee salaries and health insurance. Wages for employees are fully deductible if they are reasonable for the type of services rendered. Health coverage is also generally deductible for federal and state taxes if certain documentation is provided. Note: Sole proprietors and partners cannot deduct their own costs, only for their employees.
  • Business insurance. Most states require businesses to carry specific types of insurance, and since they’re required to operate, you can deduct this expense from your taxable income.
  • Repairs and maintenance. If you operate from a storefront, you’ll need to perform maintenance on the physical building and its components, and, from time to time, you’ll probably need repairs. These are tax-deductible. Note: This only includes maintenance and repairs, not improvements or expansions.
  • Charitable contributions. Cash donations to charities are typically tax-deductible if made to a qualified entity. Sole proprietorships, partnerships, and LLCs must put their charitable contributions on their personal income tax forms.

This list of potential write-offs is by no means exhaustive. There are numerous other types of tax deductions you can take advantage of, including advertising and marketing, bad debt, work-related travel, business vehicle expenses, business entertainment, education and training, office supplies, postage, and home office (calculated as a percentage based on size of office).

Always double-check eligibility relating to current federal and state rules on deductions, as laws sometimes change. Keep in mind that your business structure will also determine whether you file specific schedules for deductions to the IRS in conjunction with your personal taxes or if your company can file and claim deductions separately.

Prepare Your Profits and Loss (P&L) Statements

As a part of the tax filing process for businesses, you’ll need to generate profit and loss statements (P&Ls). Often referred to as “income statements” or “revenue statements,” the P&L is a comprehensive, straightforward document that presents a company’s income, expenses, overhead, and net profit. To create your P&L statement, take the following steps:

The profit and loss statement is a key document that provides valuable insight into how your business is doing in terms of success and stability. If you utilize software, such as QuickBooks or a similar program, you can easily generate this financial statement.

  • Track operating revenue. Record all operating revenue received from the sale of goods and/or services.
  • Record cost of goods sold. This documents the costs associated with your inventory, raw materials, and other fluctuating expenses.
  • Calculate gross profit. Subtract your cost of goods sold from your revenue.
  • Calculate overhead. Add up your fixed expenses, including lease/mortgage payments, payroll, utilities, insurance, advertising, and other staple expenses you have each year.
  • Total your operating income. To get this figure, subtract your overhead costs from your gross profit.
  • Factor other income and expenses. You may be generating additional income for your company outside of sales, such as dividends or subletting space. You might also have other expenses, such as finance charges, loan interest payments, or other costs – factor these in.
  • Arrive at net profit. To obtain your net profit, add or subtract your other income and expenses from your operating income. This figure will be your company’s “bottom line”.

Calculate Taxes

To find out how much tax you owe, you’ll need to calculate your taxes and enter the required dollar amount fields on your company’s tax return form. While some small businesses may do their own taxes, most will enlist the services of a professional accountant or hire an individual in-house who is experienced and well-versed in tax matters. You don’t want to inadvertently miss the required forms or other information you need to supply to the IRS.

Submit to the IRS

Once your tax statement is complete, be sure the individual tasked with assembling your tax return has double-checked it to ensure accuracy. Once all information is documented and entered on forms, you can then prepare for submission to the Internal Revenue Service.

Before filing business taxes, always consult with a professional accountant or firm before executing these instructions.

Tips for Optimizing Your Company’s Taxes

Taxes can feel cumbersome, especially if you don’t have a designated accounting department in your business. To simplify the process, use these practices throughout the year.

  • Stay organized. Set up a separate business bank account, credit card, and other accounts you need. Use a consistent bookkeeping method, save receipts, and keep everything in one place.
  • Pay estimated taxes. Be sure to pay your quarterly taxes on time, if applicable to your situation.
  • Consider hiring an expert. Working with a CPA or enrolled agent can reassure you that your company is correctly filing its taxes and won’t inadvertently be penalized for tax mistakes.

Filing business taxes is usually more complex than filing individual tax returns. It all starts with establishing a business and its legal structure and applying for an EIN.

Written by Maurice Mallory