Unsure of the information you need for the dreaded tax season? Tax time is never that much fun so, this year, make sure you don’t leave out any crucial information. You never know, a simple mistake can lead to a tax return delay—and who wants that?
To help you (the small business owner) hone your taxes in 2017, we put together this easy-to-follow tax checklist.
In the US, sole proprietors and single-member LLCs report business income and expenses on Schedule C that is attached to their Form 1040 Individual Income Tax Return.
If your business is a partnership or multi-member LLC, you’ll report business income and expenses on Form 1065. S corporations report business activity on Form 1120-S. Then the partnership, LLC or S corporation issues a Schedule K-1 to its shareholders, reporting their share of the entity’s income, deductions, and credits.
Note: This checklist will focus on sole proprietors and freelancers using Schedule C attached to their Form 1040.
Whether you file on your own or have a professional prepare your return for you, you will need to provide some basic information, including your legal name, social security number, and address. If you have a separate Employer Identification Number (EIN) for your business, you’ll need that as well as the legal business name.
If you were married or divorced or otherwise changed your name during the past year, make sure the name on your tax return matches the name on file with the Social Security Administration. Some people start using their spouse’s last name after the wedding but procrastinate on changing their name with the SSA. If the name on your tax return doesn’t match the one on file, they may reject or delay your return.
Double check your SSN and EIN while you’re at it. Any typos can cause delayed refunds.
The IRS requires that you have sufficient documentation (receipts) for all expenses related to your business. Bookkeeping software entries and even bank statements are not enough. Of course, you don’t have to send those in with your tax return, but you should maintain copies (paper or electronic) of receipts, canceled checks, bills, etc. to support your business expenses for a minimum of six years from the date you filed your return.
Be especially diligent about travel and entertainment expenses, as this is an area where the IRS and courts are strict about recordkeeping. For those items, be sure to keep detailed receipts that show the date, place, amount, and business purpose of the expense. Hotel receipts should provide a breakdown of charges such as lodging, meals, phone calls, and other services.
Keeping proper accounting records throughout the year can make it a lot easier to prepare your return at tax time.
If you are using a professional tax preparer, one of the first things they will ask you for is your bookkeeping records, such as your journal entries, profit and loss statement, and balance sheet. Print these items out or send them the digital files. They’ll appreciate how organized you are and you won’t have to pay by the hour for them to organize your shoeboxes full of receipts.
If you have a business checking or savings account that earns interest, you may receive a 1099-INT from your bank for the interest you earned during the year.
Even though the interest was received from a business account, you won’t include it with your business income on Schedule C. Instead, it will be included in Schedule B, along with any personal interest and dividend income you received during the year.
One very lucrative deduction that relates to running a small business involves the home office deduction. You may be eligible if you use your home regularly and exclusively for business. Check out the full instructions for Form 8829 for more details on whether you qualify.
If you’re eligible, the next step is knowing the square footage of your home office and the square footage of your entire home.
Then, you can deduct home office expenses in one of two ways:
To use the regular method for the home office deduction, you will take a percentage of all of the expenses of owning or renting your home and multiply them by the percentage of square footage occupied by your home office.
For example, if your home office is 150 square feet out of the total 1,500 square feet of your home, you would be able to deduct 10% of your home mortgage interest or rent payments, homeowners insurance premiums, utilities, repairs, homeowners association fees, etc.
Starting with 2013 tax returns, the IRS allowed a simplified option for deducting home office expenses. Rather than maintain records for all home utilities, repairs, etc., you can claim a standard $5 per square foot used exclusively as your home office. A 150 square foot office would equate to a $750 deduction.
You can choose either the regular method or the simplified option each taxable year so you may want to calculate the home office deduction both ways to see which one results in the largest deduction each year.
Not too long ago, many people were hesitant to take advantage of the home office deduction, because it was considered a “red flag” that might lead to an IRS audit. However, the advances in technology and rise in remote workers and freelancers mean home offices are becoming more accepted in the last few years. If you meet the qualifications, you should definitely take advantage of this valuable deduction.
Another common deduction associated with small business owners is car expenses. If you drive your own car, you need to keep a log of your mileage for business use. The IRS will not allow a deduction for business use of a vehicle without a record of the miles driven for business. Your log may be kept manually or electronically.
Like the home office deduction, the vehicle deduction is based on the percentage of business vs. personal use of your vehicle. For example, if you drove 10,000 miles during the year and 1,000 of those miles were for business, you would be able to deduct 10% of the cost of owning and operating your vehicle. Those costs might include fuel and oil costs, loan interest or lease payments, parking fees and tolls, repairs and maintenance, and auto insurance.
Finally, gather records of all assets you sold or purchased during the year. Perhaps you sold an office desk you were no longer using or bought a new laptop computer. To calculate the gain or loss on sale (if any) and depreciation expense for your furniture and equipment, you will need the cost of the asset, the date it was placed in service in your business, the date sold and the proceeds from the sale.
Self-employed people who pay for their own health insurance can deduct the premiums they pay for medical, dental, vision and long-term care insurance premiums for themselves and their dependents.
Rather than deduct self-employed health insurance premiums on Schedule C, you will report the amount you paid on Line 29 of Form 1040.
Your deduction will be limited to your net profits from the business, but if you paid more for health insurance than you made from your business, any excess costs could be deductible as itemized medical expenses on Schedule A.
These are just a few tips to help you prepare to file your business income tax return in the US. Hopefully this simple checklist helps you get organized, ready and excited for your tax preparation appointment. Remember: The more organized you are, the more time, stress and money you can save come tax time.