While tax season isn’t exactly the first thing small business owners think about immediately at the start of the new year, there’s really no better time to start prepping for it than right now. By getting a head start, your information will ultimately be much more organized and accurate. As an added bonus, if you need a tax extension you’ll also have plenty of time to file for one if you start planning ahead. Here are some tips for getting started!
Understand how your business entity will be classified and taxed.
When figuring out how your LLC will be classified and taxed, look to the amount of members your business has. As the IRS explains, LLCs with a single member are classified and taxed as a sole proprietorship for federal income tax purposes. For multi members, you may be taxed as a Partnership or a Corporation, the latter of which is also applicable to Corporations with a single member.
Once you know how your entity is classified and taxed, use the right forms to file your taxes and avoid any penalties. If you’re not sure which forms to file, the answer can be found on the IRS website. S-Corporations use Form 1120-S while Partnerships use Form 1065 and Corporations use Form 1120 to report income, gains, losses and deductions.
Get your financial documents organized.
The best way to ensure that your financial information is as up-to-date as possible is to hang on to your paperwork. All throughout 2016, you should keep receipts, bank and credit card statements, payroll documents and the previous year’s tax return in a safe place. Not only does maintaining this paperwork save you a lot of time spent searching for lost receipts, but it also provides a paper trail in the event of a potential audit.
Account for your expenses and figure out what you can deduct.
What did you spend money on in 2016? From major to minor expenses, it’s important to keep track of every small business expense. For the workplace, some of these items may include office and computer supplies, employee wages, travel expenses, office rent and insurance premiums to name a few.
Deductions must be ordinary and necessary expenses. If it’s a relevant requirement for running your business, like airfare for business travel, then it can be deducted from your taxable income. Just take care that your itemized deductions are listed in the IRS tax code to avoid a potential audit.
Determine whether or not you need to file for a tax extension.
If you already know that your business won’t be able to make the April 15 deadline, a great way to buy additional time is to file a tax extension. Individuals file their extension request using Form 4868 while businesses use Form 7004 to be eligible for a five or six-month extension.
What happens next when you’re granted an extension? Your business still needs to pay its taxes by the deadline — there’s no getting around it. Don’t use this time to dive under couch cushions to come up with money to make your payment either. Instead, meet with an accountant with all of your necessary documents. Ask your accountant to go through them with a fine-tooth comb and see if there are any deductions you’re missing. It always helps to have an extra set of eyeballs present and you never know — a write-off that you wouldn’t have spotted before might be eligible for a big deduction!
Have any questions about tax season? Let us know in the comments!
About the author
Deborah Sweeney is the CEO of MyCorporation.com, which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation and Deborah at @deborahsweeney.