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The Ultimate Entrepreneur’s Checklist for Small Business Tax Compliance

Posted by Leah Rutz to Taxes

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Do you file your business’s taxes yourself? If so, you’re in the minority.


It’s not uncommon for an entrepreneur to spend over a hundred hours organizing forms, wrangling accounting data, chasing down receipts, and engaging in the seemingly endless minutiae of federal tax preparation. If you’re not a CPA, it can feel overwhelming and unwieldy, like speaking an unfamiliar language or driving a stick shift for the first time. Where do you even begin?


Unfortunately, not all entrepreneurs have the foresight to outsource their taxes. When you can barely afford to pay yourself a salary, the possibility of working with a tax accountant the whole way through may not even cross your mind. This leaves you no option but to simply begin. So, let’s make sure you do it the right way: efficiently, and in full compliance with federal tax law.


Here’s what you need to know as an entrepreneur filing business taxes for 2016.

Complete this checklist to save some time and money before speaking to a tax preparation professional.


1. Gather Your Business’s Essential Information

What’s your company’s name and Employer Identification Number (EIN)?

You will need to file taxes under your legal name and EIN.The IRS uses this information to cross-check information from your vendors, customers, and employees.


Where do you do business?

Make a list of all the states in which your company is registered, employs people, conducts sales, or owns property.

What kind of entity is your company?
  • If you are the only owner and have not incorporated or filed articles of incorporation, you’re a sole proprietor.
  • If you've registered your business as an LLC in your home state, the LLC's default entity type for tax purposes will depend on your capital structure:
    • If you are the only owner, you are a sole proprietor.
    • If you have co-owners or investors, or other stockholders, the company is a partnership by default—in which case you will need to catalog each partner or member and the distribution of capital, profits, and liability among them. (You can find this in your Capitalization Table or Operating Agreement)
    • Default treatment will not apply if your LLC has filed certain elections with the IRS.
  • Your business is an S Corporation if you previously filed Form 2553 and received an approval letter from the IRS.
  • Your business is a C Corporation if you have done any of the following:
    • You have filed articles of incorporation in your home state
    • You are an LLC, and you previously filed Form 8832 to elect to be taxed as a C Corporation.

*For more information about business entities, click here.

Take note of any significant changes that took place over the past year.

Did your business move to another state? Did the company convert to another type of entity? Did any shareholders or partners leave or join the company? Does your company own shares of another business? If you answered “yes” to any of these questions, make sure you have details (such as dates) ready.

 

2. Know Your Tax Responsibilities

Income taxes:

The way you pay your income tax depends on your entity type. If your company is any kind of business other than a C corporation, you will need to make a payment through your personal tax return (as will any partners or co-owners) in most cases. For C corporations, the business and its shareholders will need to file separate returns.

Employment taxes:

The Federal Insurance Contributions Act (FICA) requires you and your employees to pay Social Security, Medicare, and unemployment taxes. Most states also require payments of unemployment and disability insurance. If you’re a sole proprietor, you will need to pay self-employment taxes (equivalent to both the employer and employee’s portions of the above).

State taxes:

Every state’s tax codes and tax rates are different. In addition to state and local forms of items A, B, and C above, you may be obligated to pay one or more of the taxes below.

  • Sales tax: All states (except for Alaska, Delaware, Montana, New Hampshire, and Oregon) impose some form of tax on the sale of goods and services. Typically, businesses collect these taxes from customers at the moment of each transaction.
  • Franchise tax: Most states require companies with a “nexus” in the state to pay franchise taxes. Typically companies who are not profitable and don’t owe income tax end up paying this tax. Depending on the state, franchise taxes may be a fixed amount, based on the company’s capital or net worth, or a mix of both.
  • Gross receipts tax: Some states levy a tax on a company’s gross revenue. Unlike a sales tax, this is the responsibility of the business—not the consumer.

Does your business have any activities outside of the U.S.? Consult this blog post to determine what those foreign ventures mean for your tax responsibilities.

 

3. Calculate Your Taxable Income

Add up your income:

Gather all the invoices you sent over the past year or, better yet, work with an accountant who can modify the bookings on your profit and loss statement for tax purposes. (If you’re an inDinero client, we can help with that.)

  • Include any Forms 1099 you received from your financial institution or customers.
  • Take note of any sales or returns that are pending or incomplete.
  • Record any interest you’ve accumulated in any checkings and savings accounts associated with your business.
  • Include any other forms of income (e.g. investments, royalties, and anything otherwise unlabeled) in the total.
Factor in your deductions and credits:

Your business may deduct most expenses that are ordinary (common and accepted in that business activity) and necessary (appropriate and helpful to the business) from its total income to determine its taxable income. Here are examples of common expenses you can subtract:

  • office supplies
  • depreciation of expensive equipment (worth more than $1000)
  • facilities (real estate rent, internet, repairs/maintenance, etc.)
  • wages and employee benefits
  • external business expenses (marketing, advertising, legal fees, insurance, payment to subcontractors, etc.)
  • other items—many deductions could apply to your business. Refer to this list of 92 small business tax deductions business owners should look into to find hidden savings.

Identify any federal tax credits you may qualify for based on your business activities. Credits are a great way to lower your taxable income and some can even forward into future years. So, even if you do not have an income tax liability for the current year, claiming a credit now could help your business later down the road.


Make sure you keep receipts and records that show proof of the business purposes of these expenses in case the IRS wants to inspect these expenses further.

 

4. File On Time

It’s currently February 2017. So, with deadlines on the horizon, you’ll need to work fast. Check our 2016 Business Taxes blog post to ensure you’ve completed your obligations on time.


Here are a few upcoming filing dates* to know:
  • March 15, 2017: Partnership and S Corporation tax returns and payments are due. This is also the last day to file a tax return extension.
  • April 18, 2017: C Corporation and sole proprietor tax returns and payments are due. This is also the last day to file the tax return extension.
  • September 15, 2017: The final deadline for partnerships and S Corporations who extend their filing due date.
  • October 16, 2017: The final deadline for personal returns and C Corporations who extend their filing due date.

*These dates are based on a calendar tax year, not an alternative fiscal tax year. Consult this blog for more details on how to determine your due dates otherwise.


That wasn’t so bad, was it?

Now that you’ve completed this checklist, you’re well on your way to driving a stick—I mean, filing your taxes.


Want to know the key to organizing this information? Download this fillable workbook to document all of your business’s tax return details in one easy-to-use place.

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About the author
“Leah

Leah Rutz

An MBA grad from the University of Cape Town, Leah sees entrepreneurship as a powerful force for growth and good in developed and developing economies. She enjoys helping startups handle their accounting and taxes so they can focus on their product/service, customers, and growing their business.

Success starts when you take charge of your finances.

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