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The Six Things You Must Know to File 2016 Tax Returns for Your Small Business
Tax season is upon us, and many small business owners are scrambling to pull together all the documentation needed to complete their returns. Tax preparation is expensive, time-consuming work for business owners, even for those who hire professional tax preparers. And no wonder. While the tax code in 1955 was 409,000 words, today it is around 4 million according to a National Taxpayer Advocate report. Just to get a handle on that, that’s five times longer than the Bible, both old and new testaments. “If tax compliance were an industry, it would be one of the largest in the United States,” the report says.
Changes are made to the tax code at the average rate of once a day, so business owners must stay alert in order to avoid a stumble that may trigger an audit or cost money in penalties. Whether you are a small business owner, a micro business owner or a family business owner, The National Association for the Self-Employed (NASE) would like to offer you some guidance to help you pay as little as possible in taxes, avoid IRS hassles and reduce your tax anxiety.
1. BE AWARE OF TAX FILING DATE CHANGES FOR 2017
Check with your tax preparer or www.IRS.gov for filing dates for other types of businesses and those that don’t use the calendar year.
PARTNERSHIP RETURNS
Must be filed by March 15
A month earlier than last year
C-CORPORATION RETURNS
Must be filed by april 15
A month later than last year
W-2 AND 1099 FORMS
Must be filed by January 31
A Month earlier than last year
2. CHECK YOU HAVE ALL RECORDS YOU NEED TO FILE 2016 TAXES FOR YOUR SMALL BUSINESS
Ideally, you have been organizing your tax information throughout the year. But sometimes things get crazy when you are an entrepreneur starting a business; sometimes there aren’t enough hours in the day. But please know you cannot put this off any longer. If you still need to organize documents for your taxes, do it today.
Ask your tax preparer for a small business preparation checklist if you have not yet received one. If you are doing your own taxes, you can download a free Small Business Prep Checklist from H&R Block or a Tax Preparation Checklist from Intuit, the makers of TurboTax.
Here is just some of the critical information you or your tax preparer will need to prepare your taxes:
- Income
- Cost of goods sold and inventory records
- Expenses including communications, marketing, transportation, client entertainment, parking, travel, business insurance, office supplies, rent, vehicles, travel, professional fees, home office and more
- Records of assets, liabilities and business owner’s equity
- Depreciation information
- Money paid to contractors
- Employee salaries
- Records of acquisition and disposition of capital assets
3. DEDUCTIONS CAN SIGNIFICANTLY LOWER YOUR BUSINESS TAX LIABILITY
You can’t afford to throw money away, no matter if you are growing a business or just starting a business. One of the advantages of having your own business is that you can get a tax break on items you buy such as cameras and computers. Some expenses you must depreciate; depreciation is an income tax deduction that enables you to recover the cost of the property over time as it deteriorates. Most tangible property is depreciable.
There are many types of business expenses, but they may include:
- Office rent
- Office supplies
- Furniture
- Equipment
- Home office rent
- Home office supplies
- Client entertainment expenses
- Business travel
- Start-up expenses. If you started a business in 2016 and it became a viable business, you can usually deduct up to $5,000 (with some exceptions).
For more information, see IRS Publication 535, Business Expenses on the IRS website.
4. KNOW THE FIVE TYPES OF BUSINESS TAXES
Even if you have just a family business or a micro business, you musts be aware of the types of business taxes you may need to pay.
Income Tax
All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized.
- If you have a sole proprietorship, you can report your business income and expenses as an attachment to your personal income tax return by filing a Schedule C attachment. See Schedule C (Form 1040), Profit or Loss from Business and 2016 Instructions for Schedule C on the IRS website.
- If you have an LLC and are the sole owner, you may also use a Schedule C.
- If you have a corporation or would like to file your taxes as a corporation even though you have an LLC, you must prepare a separate corporate tax return on Form 1120. You can find the 2016 Instructions for Form 1120 on the IRS website.
- A Schedule C is much simpler than a Form 1120, and a Form 1120 asks for many details that are often not relevant for small businesses.
Estimated Tax
- If you are a sole proprietor or have a partnership or an S corporation you must make quarterly estimated payments.
- Exceptions
* You think you will owe $1,000 or less in taxes
* It’s your first year of operation
- Payment dates for most businesses in 2016 are
* April 18
* June 15
* Sept. 15
* Jan. 17, 2017
- For more information on estimated taxes see Publication 505 on the IRS website
Employment Tax
Assuming you have employees, you will need to pay employment taxes.
- Social security and Medicare taxes
- Federal income tax withholding
* Form 941 is the Employers Quarterly Federal Tax Return. Use it to report wages you have paid, tips your employees reported to you and federal income tax you have withheld. See Instructions for Form 941 on the IRS website.
- Federal unemployment (FUTA) tax
*The FUTA tax, along with state unemployment taxes, is to fund unemployment compensation.
*See Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return and Instructions for Form 940 on the IRS website.
For additional information, refer to the Employment Taxes page on the IRS website.
Self-Employment Tax
- Self-employment tax (SE tax) is a social security and Medicare tax mainly for individuals who work for themselves. Generally speaking, you must pay self-employment tax and file a Schedule SE if you make $400 or more, though there are exceptions. See the 2016 Instructions for Schedule SE (Form 1040).
- As a business owner, you can claim half of what you pay in self-employment tax as a deduction. That means a $6,000 self-employment tax payment will reduce the amount income on which you owe taxes by $3,000.
Excise Tax
An excise tax is a tax on specified products such as alcohol and cigarettes. Excise taxes can also be imposed on activities such as gambling. You may have to pay excise taxes if you:
- Operate businesses of the type that are specified
- Manufacture or sell products specified under this tax
- Use specified types of services or products
- Receive payment for specified services
See IRS Publication 510 on excise taxes for more information.
To find out more about all of these five types of business taxes, see the Business Taxes page on the IRS website.
5. DIFFERENT LEGAL ENTITIES REQUIRE DIFFERENT TREATMENTS AND TAX FORMS
The legal entity of your business will have a big impact on your tax liability. For example, C corporations can deduct a wider range of expenses, but they are subject to double taxation unlike an S corp. We have given some examples of tax forms in the previous section. For detailed information on the forms you must file according to your business structure, see the appropriate link on the IRS website:
- Sole Proprietorships
- Partnerships
- Corporations
- S Corporations
- Limited Liability Company (LLC)
6. DETERMINE IF AN ENROLLED AGENT, CPA OR ATTORNEY SHOULD PREPARE YOUR TAXES
71% of small businesses use tax preparers from outside their company, according to a recent small business report. Who you use depends a lot on your business. You want to keep preparation costs down, but you want to be sure to get all your deductions and protect your business.
Businesses by their very nature have some tax complexity, so it is prudent to use a tax preparer who is authorized to represent you before the IRS in case of an audit or unforeseen problems. Some tax preparers have only limited authority and cannot represent you before the IRS. Tax preparers who have unlimited representation rights are enrolled agents, certified public accountants (CPAs) and attorneys.
- Enrolled agents are licensed by the IRS after passing a Special Enrollment Examination. If your taxes are not too complicated, it may be fine for you to use an enrolled agent.
- CPAs have gone to college in their specialty and have degrees. CPAs are accountants who have passed a state licensing examination. Unless you expect problems, this is a common choice for businesses.
- Tax attorneys hold advanced degrees in their fields. If you think you may have reason to fear legal action, keep in mind that anything you tell an attorney falls under attorney/client privilege. Attorneys cannot divulge anything you tell them. This is not true for any other tax preparers. Should you be audited or run into complicated tax problems, tax attorneys are also trained negotiators. But if someone else prepares your taxes, you can still hire an attorney to resolve problems later.
TIP: Whoever does your taxes, be sure to check them, because you must sign them and become legally responsible.
KEEPING UP WITH TAX OBLIGATIONS IS ALL PART OF GROWING A BUSINESS
If you were not as organized as you would have liked last year, start now to organize for next year’s tax season. It will save you valuable time that could better be spent working on your business, and will enable more precise reporting.