How Small Business Owners and Startups Can Prepare for Tax Season

Tax season can be a stressful time for small business owners and startup founders, but with proper preparation, the process can be streamlined and manageable. This guide provides actionable advice to help you navigate tax filing, understand deadlines, gather necessary documents, and avoid common pitfalls.

All businesses, regardless of size, are required to file taxes if they generate income. The exact requirements will vary by entity type. 

• Sole Proprietors and LLCs: Must report business income on personal returns.
• Partnerships: Must file an informational return (Form 1065) and issue K-1 forms to partners.
• Corporations: File separate tax returns for the business.
• Nonprofits: Must file Form 990 if exempt from income taxes.
• Self-Employed Individuals: Report earnings using Schedule C on Form 1040.

When to File Taxes

Depending on the type of business entity you have, your deadline for filing business taxes will vary. 

• Sole Proprietorship and Single-Member LLCs: File taxes by April 15, as these are typically reported on the owner’s personal tax return (Form 1040 with Schedule C). 
• Partnerships and Multi-Member LLCs: File Form 1065 by March 15 (or the 15th day of the third month after the fiscal year ends).
• Corporations (C-Corps): File Form 1120 by April 15 for calendar-year corporations
• S-Corporations: File Form 1120-S by March 15

Most businesses must pay their estimated taxes quarterly, with deadlines on April 15, June 15, September 15, and January 15. It’s a good idea to set aside funds throughout the year to cover these quarterly payments. If you miss one of these deadlines, you may receive penalties at the end of the year. 

The time it takes to file taxes will vary depending on the complexity of your business as well. Simple returns (sole proprietors with few expenses) may take as little as 4-8 hours, but complex returns (corporations or businesses with multiple revenue streams) can take 15-25 hours more). Hiring a professional accountant or tax preparer can save time, but will still require you to put together the documents they need. 

If you’re filing taxes for your business for the first time, make sure to give yourself enough time to gather documents and organize records well before the deadline to avoid penalties. A late filing can incur hefty fines and penalties. If you don’t think you’ll be able to make it in time for the deadline, you can file an extension (Form 7004) which will give you an additional 6-months. This extension needs to be filed by the original due date of the return.

What Documents Will Business Owners Need to File Taxes?

Having the right documentation is crucial for accurate and efficient tax filing. Key documents include:

1. Income Records:
   • Revenue statements and 1099 forms for self-employed individuals.
   • Sales receipts or invoices.
2. Expense Records:
   • Receipts for deductible expenses like office supplies, marketing, and travel.
   • Records of rent or lease payments.
3. Payroll Information (if applicable):
   • W-2 forms for employees.
   • 1099 forms for contractors.
   • Note: If you use an HR software like Gusto, TriNet, or Deel, these forms are often automatically generated for you.
4. Bank and Financial Statements:
   • Business bank account and credit card statements.
   • Loan interest statements (Form 1098).
5. Tax Forms:
   • Previous year’s tax return.
   • Estimated tax payment records.
6. Additional Documents:
   • Inventory records for product-based businesses.
   • Vehicle mileage logs for business use.

Best Practices for First-Time Business Tax Filers

1. Maintain Clean Books: Keep detailed records using an accounting software like QuickBooks, Xero, or FreshBooks to track your income and expenses throughout the year. Regularly update these financial records and reconcile accounts so you’re not left scrambling when tax season approaches.
2. Separate Business and Personal Finances: Even if you’re a sole proprietor, make sure you keep a clean separation of business and personal finances. Maintain separate bank accounts to simplify bookkeeping and reduce errors. 
3. Understand Deductions: Common deductions include home office expenses, vehicle use, marketing costs, and employee salaries. Keep receipts for anything you want to use in a deduction and be clear about what these expenses are being used for. Many small businesses fail to claim legitimate deductions, leaving money on the table.
4. Hire a Professional: When in doubt, ask a professional to avoid costly mistakes. Consider working with a CPA or tax preparer, especially if your businesses taxes are complex. Federal, state, and local tax laws may change from year to year, so professionals will make sure you’re staying compliant with the latest laws.
   Note: Many accounting software programs can actually help you file your taxes too. For example, if you use Intuit QuickBooks, it will guide you through the preparation process for your forms and you can e-file them directly.

Tax season doesn’t have to be overwhelming for small business owners and startups. By staying organized, understanding your filing obligations, and seeking professional help when needed, you can minimize stress and set your business up for financial success. With proper preparation and adherence to best practices, you’ll not only meet tax requirements but also uncover opportunities to maximize deductions and reduce your tax liability.