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Key Points to Know Before Filing Business Taxes in 2020

by
Stacey Howard
on
10/31/2019
Key Points to Know Before Filing Business Taxes in 2020

Business owners often feel anxious about filing tax returns as they're aware of high risks of penalty if they overlook anything before submitting the tax file. If you can relate to this, you probably know that it takes a lot of time and effort to prepare financial reports ahead of tax deadlines. For this reason, it is always advisable to prepare financial reports in an organized manner throughout the year for hassle-free tax submission.

If this is the first time you're filing a business tax return, you may have many questions, including which tax forms you should complete and when. If you are confused about where to start, this blog will help you understand what you should do before filing business taxes in 2020.

Business Taxes Typically Depend Upon Your Business Structure

First things first: you need to decide which tax form would be appropriate for your business type. Business structures fall into these major categories:

Sole Proprietorship

A sole proprietorship is that type of business which is owned and operated by one individual. As there's only one owner, they have to report the income and losses of their business on their personal income tax return. Sole proprietors are generally required to fill and submit a Schedule C – Profit or Loss from Business and include it with their Form 1040 when they file. If the business is profitable the business owner will need to complete and include Schedule SE to determine the amount of self-employment tax that is also due when filing the 1040. Self-employment tax is the combination of Social Security and Medicare taxes. 

Partnerships

Businesses that are running as a partnership need to file Form 1065. This will require reporting the income, expenses, losses, and profits from the business. A partnership does not pay taxes, instead it distributes the income or loss, deductions, credits, and other tax information to its partners, via a Form K-1, and each partner will include their prorate share of the partnership tax information on their individual Form 1040. The distributive share of income from the partnership, like for a sole proprietorship, is subject to self-employment tax. 

C-Corporations

A C-corporation does not pass its income through to its stockholders like the other business entities;  instead, any profit is taxed at the Corporate level on Form 1120 at a fixed rate of 21%. Shareholders receive profits from the corporation generally in the form of taxable dividends. Of note, is the fact the corporation does not get a deduction for dividends paid thus both the corporation and the shareholder end up paying taxes on the dividends – double taxed income.  Working stockholders are treated as employees of the corporation and are issued a W-2 like any other employee. 

S-Corporations

An S-Corporation is a hybrid form of business with some of its characteristics mirroring the income pass-through sole proprietorships and partnerships while a working shareholder is treated as a W-2 employee to the extent of a reasonable wage for the services provided to the corporation. The S-Corporation files a form 1120-S and all income or loss, deductions, and credits are passed through to its shareholders via a Form K-1, and each shareholder will include their prorate share of the tax information on their individual Form 1040. The distributive share of income from the corporation, unlike a partnership is not subject to self-employment tax. 

Now that we've covered company structure and the corresponding tax forms, let's discuss some key points that you must take care of before you proceed further.

1. Collect all financial records

You may never really see your company's financial statements, as your accountant probably provides you with overall financial reports monthly or quarterly. However, when it comes to filing a business tax return, all your financial records should be with you in an organized manner.

Here is a list of the most common documents to track down first:

  • Income statement
  • Bank and credit card statements
  • Balance sheet
  • Payroll documents
  • Information return filings, 1099s etc.
  • Asset purchase details
  • Accounting documents
  • Partnership agreements (if applicable)
  • Depreciation schedules
  • Last year's business tax return

By ensuring all these records and reports are on-hand, you will spend less time than it generally takes to prepare your tax return. Throughout the year, it's a good idea to utilize business accounting software to manage and maintain your company's financial records to save more time and effort.

2. Double-check your statements

In order to ensure that expenses in your income statement are recorded accurately, double-check your bank as well as credit card statements. This way, you might notice a deductible expense that was not coded correctly in your financial records.

You should also review debits and check amounts in your bank statement along with spending in your credit card statements. Carry out the account reconciliation process with complete attention to mistakes. Give statements a thorough read and look for big numbers, and make sure each amount is mentioned in the income statement as an expense. Correct any errors and prepare a new income statement before you move ahead.

3. Gather receipts for any assets purchased 

Your company's assets can include computer systems, major equipment, vehicles, furniture, and other large purchases. With the provision of the tax code – Section 179 – you can now depreciate the cost of eligible assets altogether at once in the year you purchased them.

It is important to gather receipts as you will need to mention the date of purchase for each eligible asset while filing your tax forms. The receipts will also help you determine if your assets actually qualify for Section 179, and how much depreciation can be recorded in the applicable tax year if so.

4. Take advantage of tax deductions

Tax deductions, also often called tax write-offs, are expenses that can be deducted from taxable income through a simple subtraction. Write-offs or deductions actually allow you to pay a smaller amount of tax — but only if the expenses fit the IRS criteria. Some of the most common expenses that fall in the category of tax deductions are as follows:

  • Mileage expenses
  • Home office expenses
  • Charitable donations
  • Meal expenses
  • Business insurance

5. Deduct estimated taxes you paid

Most business owners are required to submit estimated tax payments from time to time during the year. Later, when you've finished your tax return and calculated your tax liability, you need to make sure that you deduct those estimated tax payments for the year. This is a good practice as it lowers the burden of paying all the taxes at once. Apart from that, it reduced the chances of paying more tax than you actually owe.

6. Changes in business ownership

There are many potential scenarios here. For instance, if your business partner ends the partnership, or you add one more partner to the company ownership, you need to tell your hired tax expert about it. Ownership changes can make a significant difference in your company's equity. 

Changes in ownership can have some tricky repercussions; thus, before you make such a big change in your business ownership, consult with your tax preparer in order to ensure you make the best decision possible.

7. Differentiate between personal and business expenses

There are plenty of common incidents that can lead to expenses crossing over. For instance, you may buy things for your company using your personal cash, or someday you might grab your company credit card instead of your own while in a rush at the supermarket.

However, it is vital to differentiate these expenses in the end to maintain clear and accurate financial records. Where applicable, expenses should be recorded in your bookkeeping system as your personal expenses so that they would not be deducted as business expenses.

You will surely repay your company for personal expenses but maintaining records will make it much easier for you to prepare tax returns. The best you can do to prevent such issues is to use a separate bank account and credit card for company expenses. 

8. Hire an expert

Since you are busy managing your core business operations, you may not have time to keep yourself updated about the latest tax laws. Hiring a tax expert or tax preparation service means you get highly professional and skilled tax professionals who can ensure your business tax filings are calculated correctly with no errors. Many business owners prefer to outsource these tasks so they can invest that time in other parts of their business.

Tax preparation is a complex process for businesses, and the best way to mitigate all risks related to tax submission is to find out your tax liability in advance. You should also review your tax filing for the previous years to recall how you calculated your tax liability.

By gathering all financial records and reports in an organized manner before filing, you can rest easy knowing you'll have all the required information to file the return accurately and on time. If you want to free up yourself from such a task and delegate that focus and responsibility to someone else, you can always hire a certified tax preparer instead.

Stacey Howard is a guest author for TaxBuzz, a tax and accounting news and advice website. 

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Stacey Howard

Stacey Howard

Stacey Howard has six years of experience in tax and accounting. Her expertise in the field, along with her passion for the retail, manufacturing, and finance industries, has led to many significant contributions to the public conversation. Her informative articles have helped many businesses in achieving their goals.

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