Tax planning and preparation is a highly complex process, but it can be broken down into a few distinct buckets and simplified to allow business owners to complete their part of the process. Here’s a breakdown of all the basics to ensure you get the most for your money in 2018: Estimating Taxable Income, Estimating Tax Liability & Tax Planning, Determining How You Need to File Your Taxes, Filling Out the Forms, and Sending Everything In.
So, Why Is Tax Planning Important?
We’re still a ways out from the 2019 tax season, but every prudent business owner should get a head start on the process. Preparation and planning can reduce your tax liability in addition to the cost of preparing your tax return. While most business owners have a CPA or outsourced bookkeepers file their taxes for them, there is still plenty for owners to do and, more importantly, libraries of information to know to ensure you're getting the best results.
1. Estimating Taxable Income
While it’s best practice to put a plan in place prior to the start of the fiscal year there’s no better time to start your accounting records than NOW. October is a great time to see how your company has done in 2018 to date, project how you’ll do for the last three months, and estimate your taxable income. But in order to do this, you need accurate records. Where do you get those? Bookkeeping (or Botkeeping!).
Bookkeepers (Botkeepers :D) will track all of your earning and expenses throughout the year and create nice, easy-to-read reports so you can check you profitability and make smart business decisions. But they need you to supply all the information to record.
This means all records for your business’ earnings and expenses:
- Gross receipts, earnings statements, and sales records
- Checking/savings account interest (if applicable)
- Cost of goods sold (including inventory, purchases, and materials, if applicable)
- All outgoing expenses, including rent, utilities, advertising, travel expenses, fees, insurance, interest, supplies, and more.
- Loan agreements and all purchase documents for large purchases (>$2,500)
This means all records for your business’ earnings and expenses.
It’s a lot to cover, but you’ll need documentation on all cash flow to calculate your business's profitability and taxable income. This is often the most time-consuming step, but doing regular bookkeeping (at least monthly) speeds things along. Hopefully, you’ve kept good records of your business’ income and outgoing expenses! If not, start building that discipline now to help yourself (or your CPA) when tax time rolls around.
2. Estimating Tax Liability & Tax Planning
Now that you’ve got your estimated taxable income for the year, you can use it to reduce your tax liability. Either yourself or your CPA can do a dry run of your numbers using a tax software to see where you will fall. If you had a good year and need to reduce your taxable income, the most sound advice you will ever hear is to defer revenue and accelerate expenses. This means you try and push any contracts, sales, and revenue for the next three months to January, and move any expenses you expect to incur from January to December. That tax bill is getting smaller already!
Another vital use of your estimated tax liability is estimated tax payments. If you haven’t been making quarterly payments or withholding enough taxes from your paychecks, the IRS can charge you interest on underpayment and fine you a late fee. By checking your estimated liability now against how much Uncle Sam has gotten, you can see what you’re short. Pay it before January 15th to avoid missing the next quarterly payment deadline.
3. Determine How You Need to File Your Taxes
Let’s fast-forward to January. You’ve finished 2018 with a bang, tidied up your bookkeeping, and you have hard, accurate numbers to work with. Well, now we need to figure out how the IRS wants you to tell them about those numbers and pay the taxes.
This will depend on how your business is classified:
- Corporation (Type C or Type S)
- Limited Liability Company (LLC) — multi-member or single-member
- Sole Proprietorship
- General or Limited Partnership
If you’re a corporation, it’s unlikely that you’ll be filing your taxes on your own. They get their own tax returns due on March 15th. Corporate tax laws are complicated, and even if you have experience with self-filing, we recommend that you get outside help to manage these intricacies. The same applies to general partnerships.
(As an aside, while the deadline to file corporate taxes is March 15—for small businesses that file their taxes on the Schedule C of their personal tax returns, it’s April 15.)
We expect most of our readers to fall into the most common classifications for small businesses: LLCs and sole proprietorships, so that’s what we’ll focus on here. However, if you need information about filing your taxes as a corporation or partnership, reach out to us and we’ll give you a hand.
While S-corporations and Partnerships have their own forms due on March 15th, they are pass-through entities and impact a business owner’s personal return in a similar way to LLCs and sole proprietorships. Owners of any pass-through entity have to report the business income on their personal return and pay taxes using the individual tax rates. The only exception here is C-corporations who pay the corporate rate.
Which forms do I need?
Filing businesses taxes as a sole proprietor or LLC is not as complex as you might think—you’ll file your personal income tax return per usual, with a Schedule C form attached. The Schedule C is the basic form for reporting income and expenses in your enterprise and feeds into your 1040.
One of the downsides of running your own business is paying self-employment taxes. Regardless of whether or not you pay yourself a salary, you’ll probably need to fill out a Schedule SE form to figure the taxes due on your earnings. Luckily most tax software will do this for you!
Also keep in mind that if you routinely make payments to vendors or contractors, you may need to file form 1099. This form applies to entities you’ve paid more than $600 to throughout the year and any lawyers you've paid, although there are some exceptions. The deadline for form 1099s is January 31.
To recap, here are the basic forms you need:
- Schedule C
- Schedule SE
- Form 1099 (for vendors who received more than $600 in payments from your business)
4. Fill out the forms
Next, fill out the forms. For this example, we're sticking to the Schedule C. Again, this will be for business owners who have a sole proprietorship or single-member LLC.
This is where your bookkeeping and accurate accounting records from number 1 above comes in handy! There are five sections in the Schedule C you’ll need to complete:
- Gross Income — The total amount of income generated from selling products/services to your customers.
- Expenses — All of your outgoing expenditures, including rent, utilities, insurance, contract labor, asset depreciation, supplies, and employee wages.
- Cost of Goods Sold — Only necessary if you have inventory or manufactured, purchased, or sold products that generated revenue.
- Vehicle Deductions — Only necessary if you’re deducting business-related vehicle expenses or mileage.
- Other Expenses — Only necessary if you’re deducting uncategorized expenses not covered in Part 2.
If you’re self-filing, your tax software can help walk you through these forms and what data needs to be included. It will also automatically fill out numerous other forms triggered by some of the information you input on your Schedule C.
If you’re a single-member business with less than $5,000 in business expenses in 2018, you can streamline this process with the Schedule C-EZ form. This form omits Parts 3 through 5 on the normal Schedule C. Take your records from part 1 and fill out the form as thoroughly as possible
5. Send everything in
Once you’ve finished your Schedule C and completed the remainder of your personal income tax return, it’s time to file. The best way to file your tax return (aka send it to the IRS) is using the electronic filing option on most tax softwares. If you’re old school, you can mail your returns to the IRS using the information on the IRS website.
Note that if you can’t complete this process by April 15, you may file for a six-month extension, which sets your extended deadline to October 15.
And that’s it! The process can be fairly straightforward for a small business, but as your inventory, employees, and possible deductions scale up, things can get complicated. Don’t be afraid to reach out for support. Getting the help of a qualified bookkeeper can help you manage the process—and avoid any potential IRS penalties down the line.