Here’s a question, Do small businesses prepare tax returns? How to file it? Perhaps those are the queries you have in mind that made you read this post. You’re on the right page! Here we’ll talk about it, and give you some tips to Prepare Your Business Tax Return.
Understanding Tax Return
Not all startups knew what Tax Return means so I’ll explain it first. By definition, it’s a report or documentation filed with a national or local tax authority for determining the amount of taxation, usually consisting of forms completed by the taxpayer.
Tax returns enable taxpayers to determine their tax liability, plan tax payments, or qualify for tax overpayment refunds.
Business Tax Return on Entities
Now, let’s answer the question about small business taxes, does it apply to them? How about tax returns? The answer depends on the entity of the business (i.e. Sole Proprietorship, Partnership, LLC, Corporation), let me elaborate.
Sole Proprietorship Taxes and Tax Return
Since this entity is owned and operated by a sole individual, it doesn’t have a business tax. What you have instead, if your business is registered under this entity, are personal taxes. In other words, business profits are taxed according to your personal income tax rate and you’re also responsible for paying self-employment taxes. When it comes to tax returns, reporting business income and losses will fall on your personal income tax return too.
Partnership Taxes and Tax Return
This entity is usually owned and operated by two or more persons. There are two types, the general partnership and limited partnership. The general partnership divides everything about the business equally (income, workload, liabilities, etc.). While limited means the other one usually just acts as an investor and owns only a portion of the business. When it comes to taxes, it’s the same with sole proprietorship, it uses “pass-through taxation”. All taxes, including tax returns, will fall on each owner’s personal income. No business or corporation tax.
Corporation Taxes and Tax Return
When it comes to taxes, debts, and liabilities, a Corporation means your business is legally separated from you as the owner. But it also means that there’s “double taxation”. Your business is subject to a flat rate of 21% tax on profits, and when profits are distributed as dividends, shareholders are taxed on their personal tax returns.
Note: There’s another kind of Corporation, it’s called an S-Corporation. This one uses “pass-through” taxation like sole proprietorship and partnership. Which means no corporate taxes but there are personal taxes on shareholders.
LLC Taxes and Tax Return
A Limited Liability Company is kinda like the hybrid of Corporation and Partnership. The owners are legally separated from the company’s liabilities and debts, but also enjoys “pass-through” taxation like a partnership entity.
Business Tax Return Preparations
If you want to make things easier when filing your small business tax return, preparation is the key. Here are the steps how:
Gather Business Records
This is the first step in preparing for tax return. Of course, your tax report should have a basis. And to be accurate, here are the things that you need to gather:
- Accounting documents
- Payroll documents
- Previous year’s business tax return
- Bank and credit card statements
- Depreciation schedules
- Partnership agreements
Additionally, you should keep these receipts and documents to make a thorough Accounting of income and expenses, all of it to be precise:
- Sales records
- Checking and savings account interest
- Gross receipts
- Office supplies and equipment
- Phones and other communication devices
- Returns and allowances
- Unclassified income
- Professional fees
- Employee wages
- Contractor payments
- Place of business rentals or mortgage
- Advertising costs
- Insurance premiums
- Business transportation and travel expenses
Pro Tip: Use an accounting software or a spreadsheet to record and organize your business transactions. There are programs that would automatically calculate income and deductions for easy tax return filing. Lastly, it will be easy for you to locate these documents if they’re all digitally saved inside a program.
Select the Right Form
When it comes to filing for a tax return, there’s no one form that fits all. You should choose the one that suits your business entity or structure. For small businesses under sole proprietorship, partnership, and those that use “pass-through” taxation should use Schedule C or Schedule C-EZ with form 1040 or 1040-ES. For corporations and non-pass-through entities should use form 1120, and 1120S for S-Corporation.
Pro Tip: There are computer programs or software or websites that automatically choose and fill the form out for you, so it can be done with utmost accuracy.
Fill out the Right Form
Aside from filling out the forms with necessary details, a little bit of calculation is needed.
For Schedule C, to arrive at your net profit or loss, subtract expenses from business earnings. Then transfer the number you’ve come up to your personal income tax form, and include it with all other personal income tax items. It’s the same calculation if you will use a form 1120 or 1120S. But there are more details on the form that it requires. It is separate from personal income which makes it less complicated.
To get a copy of the form, you can search it on the IRS website. Tho there are computer programs that automatically generate the form for you too.
Be Aware of Filing Deadlines
For small businesses taxed on Schedule C, it is part of Form 1040 and thus there are no different deadlines for filing. It is usually subject to the same April 15 deadline but it is July 15 for 2020.
Small businesses are taxed as a C-Corp, form 1120 is filed by the 15th day of the fourth month (April 15) following the close of the tax year. (However, the April 15 deadline has been extended until July 15, 2020, for 2019 tax returns filed in 2020,)
For small businesses taxed as an S-Corp, form 1120S is filed by the 15th day of the third month or March 15. Note: Do not send this form to the IRS with your personal income tax return.