Business owners have many responsibilities in addition to filing taxes. If you find yourself scrambling to get ready during tax season, having a comprehensive checklist can help you save time, file your returns more accurately, and even avoid penalties.
If you are always prepared for tax season, this checklist is also an excellent way to compare whether you have all you need. In addition, having a checklist allows you to have all the critical documents you need to maximize your deductions.
Having a thorough picture of your finances also makes the process more effective for your bookkeeper or accountant.
Understand Your Tax Responsibilities
The IRS requires all businesses to pay various taxes. Understanding your tax obligations allows you to know which forms to fill out and which documents to bring. Your tax obligations are dependent on the type of business you run.
- A sole proprietor uses Form 1040 and attaches a Schedule C Form. You can also use a 1099-MISC
- S-corporations use Form 1120S
- C-corporations file returns using Form 1120
- Partnerships are required to file their taxes using Form 1065 and additionally provide individual information for each partner’s incomes, expenses, and losses on Schedule K-1.
Consult Your Tax Professional
Hiring a bookkeeper or an accountant is a valuable investment for small business owners. Tax professionals are experienced and equipped to answer most of the tax preparers questions.
It is important to set some time to review your finances with the help of a bookkeeper. This allows you to reconcile all your accounts in advance. You can also use this time to go over the balance sheet and review asset purchases.
Consulting your bookkeeper also prepares you for your tax appointment and allows you to ask for an extension if necessary.
Collect All Business Records
Gathering your financial records is a key for your tax preparation checklist. Some of the most common documents you might need before filing your returns are:
- Income statement
- Balance sheet
- Payroll documents
- Asset purchase documents
- Depreciation schedules
- Partnership agreements
- Bank and credit card statements
- Previous years tax returns
- Accounting documents
Having these records ensures you save time in tax preparation. Most businesses who have automated their financial processes use accounting software to generate these documents quickly and easily.
It is critical to ensure that your financial records have the correct information because the IRS can verify them and penalize any inaccurate information.
Reconcile Loan Balances
As previously mentioned, the balance sheet is critical as you prepare for tax day. You must also reconcile all loan balances to your balance sheet as it adds to the liabilities that reflect at the end of the year.
It also helps you identify any fraudulent activity, detect any errors before your file returns, and monitor transactions to ensure that they are properly recorded.
Separate Personal Expenses from Business Accounts
Small business owners should separate their personal transactions from their business. If you purchase items for the business from your personal accounts, you can file for tax deductions and reduce taxable income.
Review your personal account for the year and capture any business expenses. You can also issue yourself a reimbursement check from the business account.
If there are expenses you do not remember at the time of filing your taxes, you can credit the equity account and debit an expense account.
Capture Business Expenses
Business expenses can be categorized as deductibles if they contribute to your business. Capture expenses such as meal reimbursements, advertising, rent, and utilities among others.
The IRS Tax Reform Small Business Initiative also offers more solutions that minimize your tax burden.
Note Partnerships and Any Other Ownership Changes
If your business has gone through ownership changes such as adding or buying out new partners, its equity is affected.
Take note of any changes such as stock options for employees to reflect the true value of capital accounts for each owner.
Ownership changes can have significant tax ramifications, so it is always important to consult a tax professional before making any decisions.
Check IRS guidelines for relevant information returns for small businesses to learn more about what the IRS might require for businesses that have changed ownership.
Summarize Annual Investment Activity
Pull receipts for assets such as computers, furniture, vehicles, and other significant purchases that cost more than $500 and will be used in the business for more than a year.
Business assets depreciate slowly which allows businesses to deduct the full purchase price over several years.
However, you can also depreciate some assets at once with the Section 179 tax code. Keep a copy of the purchase for your records and another for your tax professional to determine whether the asset is eligible for a depreciation deduction.
Issue 1099s As Required
The IRS requires business owners to issue Form 1099 to non-corporate providers who receive more than $600 annually.
If you pay for these services using a debit or credit card or an online payment platform the payments should be recorded in Form 1099-K.
Consult your bookkeeper to find out which rules apply when reporting Form 1099.
Deduct Estimated Tax Payments
Small businesses must make quarterly tax payments. In addition, business owners must make payment of payroll taxes on a continuous basis. These are critical to reducing the tax liability when filing your taxes.
Provide a list of estimated tax payments and dates to reduce your tax liability and prevent overpaying.
Meet Your Tax Preparer
Showing up on tax day without all the necessary requirements results in multiple trips and increased delay of the process.
Meeting your tax preparer in advance helps you prepare all the information you need beforehand and any other additional information you may need for personal tax returns.
A professional tax preparer will have an organizer to ensure you are fully prepared for your tax appointment.
Request an Extension If Required
If you are unable to file on time, you can request a filing extension to get more time to prepare. Use an e-file to get an automatic extension until fall.
Remember to check the deadlines and make payment before the due date even when filing for an extension to file your returns.
Late payment results in penalties, fines, and back taxes.
When preparing for tax day, having a comprehensive checklist helps make the process smoother and faster.
With this checklist, you will be well-equipped to plan continuously throughout the year and minimize the stress and frustration that is common during tax season.
We recommend hiring a tax professional to help you save time and maximize deductibles on tax day.