Small Business Tax Checklist 2021
Tax time is right around the corner, and it’s time to get prepared. Preparing and filing your taxes can always be stressful, but add in new tax laws, additional deductions, and the COVID-19 pandemic, and this year may seem even more overwhelming than years past. Know that you’re not alone in the race to meet this year’s filing deadline. With this guide (and your accounting software), we’ll show you how to be fully prepared for this tax season.
In this post, we’ll cover everything you need to help you prep for your tax filings. We’ll discuss how to get your accounting software up to date before filing, what accounting reports you’ll need to fill out your tax forms, important filing information, and more. We also have a downloadable tax checklist to make sure you don’t overlook a single step. Download this checklist to get ahead of the tax game and read on to learn some of our tax filing tips and tricks.
|Merchant Maverick’s Tax Prep Checklist (PDF)|
What Do I Need To File My Taxes?
Tax season doesn’t have to be hard or stressful. We’ll break down the entire process into six easy steps, so you can successfully prepare your small business taxes. Follow these steps and our free tax prep checklist to help you stay on top of preparing and filing your small business taxes:
Step 1: Have General Personal & Business Information On Hand
Filing your small business taxes requires basic personal information. You want to have this on hand to use on your tax forms or written down for your accountant or tax professional if you’ve hired one to file your tax return. The information that is needed is pretty simple, but you want to ensure that you (or your tax pro) input the correct information to prevent any delays with the IRS. This information includes:
- Basic Personal Information: This includes your legal name and address. If your legal name has recently changed (for example, following a marriage), ensure that your name has been changed through the Social Security Administration. To avoid a delay or rejection of your return, your name must match what’s on file with the SSA.
- Basic Business Information: If your business operates under a name other than your own, you need to provide the full legal name of your business on your tax return. You will also need to provide your business address.
- Social Security Number: Your social security number is required to file your taxes. Like all other information, ensure there are no typos that could delay your return.
- Employer Identification Number: Depending on the legal structure of your business, you may have a Federal Employer Identification Number (EIN) that was issued by the IRS. If your business has an EIN, it should be added to your tax return.
Step 2: Know Which Tax Forms To File
One of the most critical steps in filing your taxes is making sure that you complete and submit the correct forms to the IRS. Which forms you need to file depends entirely on the type of small business you have: Sole Proprietorship, Partnership, Corporations, S Corporation, or LLC. The IRS Business Structure site will tell you every tax form you need to file, depending on your business. Some of the most common are income tax, Schedule Cs, 1099-MISCs, W-2s, and W-4s.
If you hire an accountant to do your taxes for you, he or she will be able to tell you which forms to file. Accountants often charge by the hour, so having the necessary information in place from the start saves them time and saves you money. Being prepared is the best gift you can give them (and yourself).
In addition to knowing which forms to file, it’s also essential to know your deadlines. While a Schedule C, for example, can be filed with your individual income tax return due on April 15, other forms (such as the 1120-S for S-corps) have other due dates as set by the IRS.
Step 3: Record Income & Expenses
Accuracy is vital when reporting your income and expenses. Avoid audits, penalties, and fees by accurately tracking your income and expenses. The easiest way to do this? Your accounting software.
Your accounting software makes it easy to track your income and expenses throughout the year. You can use features such as receipt scanning and automatically adding transactions from your bank account to easily and accurately record income and expenses. These records can then be used when filing your tax return. Don’t have accounting software? Take a look at our accounting and bookkeeping software reviews, so you can be prepared for next tax season.
When recording and reporting your income and expenses, there are a few things to keep in mind. First, make sure that your business and personal expenses are kept separate. The easiest way to do this is by maintaining separate bank accounts, but you can also use your accounting software to separate transactions. You should also categorize your expenses — a task easily handled through most accounting software programs.
When using your accounting software, it’s also important to determine what type of accounting you’ll be using for your business: cash-basis or accrual. This affects how you will report your income from year to year. With accrual accounting, a transaction will post as soon as it occurs, even if no money has exchanged hands. For example, a transaction would be recorded after an invoice is sent or a bill is received. On the other hand, you record transactions with cash-basis accounting once a bill has been paid, or a payment from a client has been received.
The method of accounting that you use makes a difference when it comes to filing your taxes. Unsure of which is best for your business? Check out our article, Cash VS Accrual Accounting: Which Is Better For Your Business, to determine which is the right choice for you.
Finally, make sure that you keep important documents, such as receipts, canceled checks, and bills, so you can be prepared if your return gets audited by the IRS.
Step 4: Run Financial Reports
Having your financial reports ready when it’s time to file your taxes will make the entire process faster and easier for both you and your accountant. Fortunately, if you have been using accounting software throughout the year, running financial reports is easy.
What reports should you prepare for tax time? Start with these:
- Balance Sheet
- Profit & Loss Statement
- Income Report
- Expense Report
- Inventory Valuation
- Total Cost Of Goods (COGS)
- Sales Tax Summary
- Payroll Summary
- Mileage Log
- Asset Depreciation Log
It is also important to note that even after you file your taxes, you must hold on to the records prepared above; they will be incredibly important if the IRS decides to audit you somewhere down the line.
How long should I keep my business records, you ask? Many people will tell you three years, but in some cases, the IRS can file an audit up to six years after a filing (or even an indefinite period, depending on the reason for the audit). Tax records are absolutely an instance where it is much better to be safe than sorry.
Read our article on 12 Tips To Avoid A Tax Audit to learn more.
Step 5: Determine Your Deductions
What business owner doesn’t like saving money? Keep more of your earnings in your pocket by taking advantage of the deductions that can reduce your taxable income — thus lowering your tax burden. One important thing to note here is that keeping track of your deductions throughout the year can simplify the tax filing process.
However, if you failed to track your deductions this year, take this time to familiarize yourself with standard business deductions, use any that apply to your business, and plan to track your deductions moving forward.
Some deductions that may apply to your business include:
- “Pass-Through” Income Deduction: This is one of the newest deductions outlined in the Tax Cuts and Jobs Act. Qualifying small businesses may receive an income reduction of 20%. Talk with your accountant or a tax professional to find out if you’re eligible for this deduction.
- Home Office: If you have a dedicated space in your home that is used exclusively for business, you may qualify for the home office deduction. You can deduct a portion of your expenses, such as utilities, insurance, and repairs. Or you could opt to use the simplified deduction of $5 per square foot up to 300 square feet.
- Rent: Rent payments for your commercial space can be deducted on your tax return.
- Advertising & Marketing: Not only does advertising and marketing bring in new customers (and more revenue), but these expenses are fully deductible come tax time.
- Vehicle Expenses: If you use a car or truck for your business, you can deduct this expense on your tax return. You can opt to itemize your expenses (think gas, maintenance, and insurance), or you can take the standard deduction at the rate set by the IRS.
- Supplies: Office supplies and other supplies used to operate your business are deductible expenses.
- Software: Business-related software, including your accounting software, can be written off on your tax return.
- Employee Expenses: Employee wages, bonuses, benefits, and educational expenses are all deductible.
- Insurance: You can write off business insurance premiums as well as health insurance premiums if you’re self-employed.
- Travel Expenses: If you travel for business, such expenses as your transportation and lodging can be deducted on your business tax return.
If you received COVID-19 relief through the Economic Injury Disaster Loan (EIDL), the EIDL grant, or the Paycheck Protection Program, the good news is that the funds you received are not taxable. Even better, you can write off eligible expenses paid for using your grant or loan funds. This includes payroll expenses, rent, employee benefits, and more. Learn more about how PPP loans and EIDLs affect your taxes.
These are just a handful of the deductions that can help reduce your tax burden. Check out our complete list of small business tax deductions to learn more about how you can save money this tax season. You can also maximize your deductions by talking with an accountant or tax professional.
One last thing to note is to make sure that you keep all of your receipts and records to be able to back up these deductions in the event of an audit.
Step 6: Get The Most Out Of Your Accounting Software
If you are filing your taxes yourself, it is incredibly important to do your research and take advantage of every resource possible — including your accounting software.
Most accounting software companies offer some degree of tax support. Read our guide, The Secret To An Easy And Stress-Free Tax Season For Your Business, to learn which tax forms your software supports. There are also many small business tax resources for those who need a helping hand, including:
- IRS Virtual Workshops: When in doubt, ask the IRS. The IRS has nine videos for small business owners as well as all information necessary for tax filing.
- First-Time Business Owners: A Brief Guide to Tax Filings: The Entrepreneur put together a helpful tax filing guide for those of you who are new to business taxes.
- Careful Cents: Careful Cents is a blog run by tax expert Carrie Smith, who offers two free books — “Tax Toolkit: A Checklist for Self-Employed Biz Owners” and “The Ultimate Guide to Self-Employed Tax Deductions.”
Getting Started With Our Business Tax Checklist
Tempted to wait until the last minute to file your taxes? Don’t wait — be prepared, file your taxes, and head into the new year with a focus on other aspects of your business. Once you’ve pored through the information in this article, download our business tax prep checklist. This checklist can help you make sure you have everything you (or your accountant) need to effortlessly file your taxes. You can also check out our Complete Guide To Small Business Taxes to make sure you’re prepared this tax season. Good luck!
|Merchant Maverick’s Tax Prep Checklist (PDF)|