The Essential Tax Preparation Guide for Small Businesses

However, with a bit of organization and the help of our business tax prep guide, getting ready for tax season can be made easy, just as simple as managing books with an online accounting solution.

What to do before tax preparation

Although it’d be easy to just jump straight into preparing the business’s taxes by copying the relevant information from the company’s records and pasting it into the right forms, the process shouldn’t be started without consulting your accountant first. Many bookkeepers are certified to prepare business taxes, but if they aren’t they should still be able to explain exactly which documents are needed for tax preparation or spot any errors and missing entries in the books. But importantly, businesses using online accounting software are less likely to encounter errors, especially if they have entered all the data correctly and reconcile on a regular basis.

Speaking of software, businesses also need to decide whether they will turn to a professional tax preparer or use an online tax program. While the former option is more personal, tax software is cheaper, includes the required business tax forms by default, and even helps taxpayers throughout the whole preparation process with its thorough quizzes and built-in tax calculators.

Mandatory things to include in tax forms

Income

With the exception of interest income – which has to be reported on a Schedule B attached to your 1040 – all sources of income must be included in the business return. However, there are two things to remember. Firstly, you need to fill out a 1099-MISC form for each client that paid more than $600 in the last fiscal year. Secondly, if the business was paid by credit or debit card over 200 times and made $20,000 in sales, a 1099-K is required to be included in the return, too.

Thankfully, acquiring this information is rather easy with online accounting software as not only is there an option to filter income sources based on customer, amount, or payment method, but many programs also create reports containing the relevant data.

Expenses

The general rule of thumb is that all expenses related to the business have to be duly recorded, which can easily be done with an online accounting program especially if it’s reinforced by third-party solutions that track these details. In fact, proper expense management is particularly important as many expenditures – including but not limited to advertising, education, employee benefit programs, insurance, licenses, office supplies, rent, and travel – can be deducted from the total tax amount to be paid, provided that they are properly itemized. It’s worth adding that accounting and taxation fees are also fully deductible, but only if they were spent solely for business purposes.

There are certain exceptions to these rules, though, such as vehicle and home office costs, where only a certain percentage of the costs can be deducted. In these cases, only those expenses that were exclusively spent on business purposes can be deemed deductible.

Assets

Although it would be logical to categorize them as expenses, assets – which are items purchased for more than $500 and have been in use for more than a year – should be treated differently. For starters, the purchase price of the asset has to be depreciated, meaning that only a portion of the original price can be deducted each year until the asset is either fully depreciated or sold.

And when it comes to selling assets, it’s also necessary to report whether there was any gain or loss on them. If the amount for which the asset was sold is bigger than the accumulated depreciation, then the sale is classed as a gain and therefore should be recorded as income. However, if the amount is less than the accumulated depreciation, then it’s an expense and is fully deductible in the year that the asset was sold.