What Records Do I Need
You must keep records of your transactions to support income and expense claims. Support your reported income with original documents. These include sales invoices, bank deposit slips, fee statements, contracts and receipts.
Keep receipts of each transaction to support your expenses. The CRA wont accept your bank or credit card statements to justify deductible business expenses. Make sure you have an itemized receipt that corresponds with the transaction.
The receipts must show:
- The date of the purchase
- Name and address of the seller or supplier
- Your name and address
- The full description of the goods or services
- The sellers business number if they register for GST/HST
If you dont have receipts, the CRA could disallow your expense claims.
LEARN MORE: 7 simple ways to organize your receipts.
Keep your records for at least six years after your last Notice of Assessment, which is as far back as the CRA will ask to see them in the event of an audit. You can keep the physical receipts or digital copies.
Write Off Your Startup Costs
Many brand-new startups make the mistake of thinking initial business expenses arent deductible until their businesses are fully operational. However, the IRS allows small business owners to deduct a wide array of startup expenses before beginning business operations.
The IRS allows you to deduct up to $5,000 in business startup costs and up to $5,000 in organizational costs, but only if your total startup costs are $50,000 or less. With the help of your tax software or a tax expert, you can write off typical costs associated with setting up a business during tax filing.
Typical costs to set up a business include business insurance, office space, real estate, office supplies, business cards, business assets, professional fees , and small business loan fees. If youre operating your business from a home office, you can qualify for a home office deduction.
Additional costs can also include employee training, locating suppliers, and advertising to potential clients. While companies cannot deduct licensing and incorporation fees as startup expenses, these costs may be deductible as organizational expenses.
Its important to remember that startup founders can only deduct those expenses leading to the creation of a viable business entity. If you decide against forming your business, the above costs will be labeled as personal expenses, and you may not be able to deduct any of your costs.
Best Practices For Small Business Taxes
Running a business is hard enough without adding the complexity of filing taxes each year. The key, experts say, is to work with your accountant throughout the year, not just when you prepare your tax return. Making financial decisions without consulting an accountant or financial adviser can put you at risk and cost you more money in the long run, says John Blake, CPA, in Hamilton, N.J.
Here are nine best practices for small business when it comes to tax preparation and small business accounting, and working with an accountant or financial professional.
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What Is The Small Business Tax Rate
When you think of business taxes, you may be thinking about the federal business income tax rate. But the National Federation of Independent Business says most small businesses don’t pay income tax at a business rate.
That’s because about 75% of small businesses are not corporations. This large percentage of small businesses are considered “pass-through” entities, which means they pay tax at the personal tax rate of the owners.
Since small business tax rates are tied to the total income of the business owners, we need to look at the current individual income tax rates.
The 2021 tax tables show that the top federals income tax rate is 37% on $523,601 of taxable income for individuals and heads of households and $628,301 for married individuals filing jointly. A small business owner with income this high, whose company is a pass-through entity, would be taxed at this rate.
Don’t Ignore Your Business Taxes
Perhaps the biggest mistake many small businesses make is not researching the taxes they have to pay. Not filing your taxes properly can get your business into big trouble.
By learning about any taxes that apply to your small business upfront, you’ll avoid potential pitfalls and be able to spend more time making your business successful.
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Business Taxes For Partnerships
Partnerships are businesses operated by two or more owners. Most partnerships are known as general partnerships, but there can also be limited partnerships or limited liability partnerships. Business owners who are a part of the partnership must pay income taxes, self-employment taxes, and quarterly estimated taxes.
If you operate a partnership, the business has to file Form 1065, which is an annual information return that shows the income, deductions, gains, and losses from the businessâs operationsâbut the business itself doesnât pay any income tax. Partnerships enjoy whatâs called âpass-through taxation,â meaning the income is taxed on the owners of the business instead of being subject to corporate tax rates.
Therefore, to file small business taxes, owners who are included in the partnership have to file their respective share of the businessâs income and losses on their personal tax returns. Each partnerâs share of the businessâs income and losses are shown on a Schedule K-1.
Filing Taxes As A Sole Proprietor
Sole proprietorship is exactly what it sounds likeâitâs a fancy way of saying an unincorporated business that has only one owner. In businesses slotted into this category, there is no legal distinction between the owner and the business entity.
If you run your own company with no partners, filing taxes is incredibly simple. All you have to do is fill out a Schedule C when you file your annual personal tax return. The IRS Schedule C is a form that you attach to your main individual tax return on Form 1040. Essentially, it just gives you a way to tell the IRS about the profit or loss from your business.
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Any Small Business That Pays Contractors
If your small business has paid $600 or more to a contractor or professional , youâll also need to file Form 1099-NEC as part of your taxes. Check out our guide to filing 1099s to learn more. These forms need to be ordered from the IRS, so you need to ensure that you request them well in advance of the February 1 deadline.
Do You Need To File A Business Tax Return With No Income
Based on your business type, you may or may not have to file a tax return if your business has no income for the entire tax year.
Sole Proprietorship
Even if your business has no income during the tax year, it may still benefit you to file a Schedule C if you have any expenses that qualify for deductions or credits. If you have no income or qualifying expenses for the entire tax year, there is no need to file a Schedule C for your inactive business.
Partnership
If the partnership has any transactions that qualify for deductions or credits, an informational Form 1065 should be filed. If your partnership has no income or expenses that may qualify for deductions or credits, you do not need to file a Form 1065.
C Corporation or S Corporation
Typically, a C corporation or S corporation must file an income tax return on taxable income during the tax year unless it is exempt from taxes under section 501.
Limited Liability Company
Whether or not you need to file a tax return for an LLC with no income depends on your LLC’s tax election. If you are a single-member LLC, you will apply the same standards as a sole proprietorship. If your LLC is taxed like a partnership, apply the rules for filing an informational partnership return. If it is taxed like a C corp. or S corp., you will need to file an income tax return regardless of whether you have any income.
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How To File Sales Taxes
As the owner of a small business, you will be responsible for filing your income tax returns, as well as your sales tax returns. Whether you provide services or a product to the public, you will need to charge and collect sales tax on your customer transactions. The sales tax charged, either GST, PST, or HST, or a combination of the three, will differ based on the products sold and where in Canada you are located. Learn more about the provincial sales tax here.
Once youve collected your sales tax for an accounting period, you will need to send this money to the CRA. Depending on your filing periods, you will need to file sales taxes monthly, quarterly, or annually. To help you prepare your sales taxes and determine if you are required to file online or through the mail, the CRA recommends using the GST/HST Return Working Copy.
Use Tax Deductions To Lower Your Tax Bill
New small business owners have to stretch their financial resources.
Small businesses have business expenses that include vehicle expenses, wages, business travel, contract labor , supplies, equipment, depreciation of assets, rent on business property, utilities, insurance , and repairs.
Fortunately, as a small business owner, you are able to minimize your business taxes by writing off a lot of those operational expenses come tax season.
Tax preparation software such as the QuickBooks Self-Employed Tax Bundle with Intuit Turbotax automatically tracks your business expenses to minimize your federal tax burden, which allows you to easily claim your deductions.
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The Complete Guide To Filing And Paying Small Business Taxes
One of the most complex parts of running your business is understanding and fulfilling your tax responsibilities. Unlike your personal tax returns, which are usually completed with a few forms once a year, theres a lot more involved with preparing and filing your business taxes. Especially if this is your first time filing small business taxes, you likely have a number of questions about how you go about it, which forms to fill out, and when. Were here to help.
In this guide, well explain everything you need to know about small business taxesâincluding the types of taxes you may be responsible for, how to identify your tax responsibilities based on your business structure, and finally, when and how to pay and file your business tax return.
Prepare For The Unexpected
- The Department of Health provides a wide range of resources to help you prepare for public health emergencies including bioterrorism events, disease outbreaks and natural disasters. You can find fact sheets, links and additional information at the Department of Health website.
- Being part of an industry or business association can provide you a network of colleagues and opportunities for specialized training to help you deal with the unexpected.
- Unexpected events, such as fires, floods, storms and earthquakes, could damage or destroy your records, damage critical equipment, or close your business for a period of time. Establishing a business continuity plan in advance will help you get your business up and running more quickly.
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Free File Fillable Forms
With Free File Fillable Forms, youâre essentially filling out electronic versions of paper tax forms. You do it through the IRS website. They handle basic calculations, but donât do any error checking. Itâs up to you to make sure you fill in everything correctly.
How it works
Once you create a Free File Fillable Forms account with the IRS, you can log on to select and fill out the relevant forms for your business. After filling out the main part of your return, youâll need to select which income documents youâre includingâW2s or Form 1099s, for instanceâand then enter information from them.
Free Fillable Forms automatically estimates how much youâll receive as a tax refundâor how much youâll have to pay. You can pay your taxesâor get your refundâby entering your bank info, and receiving a direct electronic funds transfer from the IRS.
Finally, you digitally sign your return, and submit it to the IRS. You have the option of printing off a copy for your records.
Is it worth it?
Free File Fillable Forms only works for the current tax yearâso you canât use them to file back taxes. And itâs only for filing federal taxes, not state.
Using Free File Fillable Forms only makes sense if youâre already experienced and comfortable with filing your own business taxes by handâand if those taxes arenât too complex. If you check all the above, and you donât want to do your taxes with a pencil, then the Free File Fillable Forms are a great choice.
What Financial Records Do I Need To Keep For Tax Time
When trying to decide what kinds of records to keep for calculating your income taxes, dont overthink it.
If the receipt or bill relates to income or an expense directly for the business, track the receipt.
If you use small business financial tracking software with a companion app, such as QuickBooks Canada, or a financial tracking app alone, such as Mint Canada, you can enter your income and expenses as they occur, which is information that you will find extremely valuable when you are calculating your taxes.
Whether using an app or software, you can list notes about each expense or income line item, or you can place each item into a category. Having these items sorted makes tax time far easier than looking at a faded 9-month old receipt, trying to remember exactly what you purchased on that particular day.
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Separate Personal And Business Expenses
This can be very difficult to do if youâre a sole proprietor conducting business out of your home. Nevertheless, it is essential because the IRS has strict rules about not using personal expenses as business deductions. For example, say you use your car for both personal and business purposes. You need to keep an accurate log of your business uses of the vehicle.
The same principle applies to your finances. To keep business spending separate from your personal finances, consider opening a separate checking account. You do not necessarily need a business account a separate personal account will suffice.
Small Business Taxes Based On Business Structure
All in all, these are the basics of paying your small business taxes:
- What types of taxes you need to pay
- How much you have to pay in taxes
- When you have to pay business taxes
- And how you pay business taxes
When it really comes down to it, however, these four basics depend on your businessâs legal structure. Your business entity type will dictate your tax burden. Letâs explain:
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Deadlines For Quarterly Taxes
If you anticipate owing $1,000 or more on annual taxes, you are required to pay estimated taxes quarterly and file a tax return annually. This includes freelancers and many other sole proprietors.
Estimated quarterly taxes are due on the following dates:
Usually, April 15 is both the date your estimated taxes for the previous quarter are due and the day your annual tax-filing paperwork is due. However, the IRS has moved the individual tax-filing deadline for the 2020 tax year to May 17. The IRS hasnt given too many additional details, so we recommend consulting with an accountant to learn more about when your quarterly taxes are due this year.
Dont Be Afraid To Ask For Help
Filing business taxes is very different from filing individual taxes. Different rules apply, and you require different tax forms, probably in greater quantities than youâve ever used before. The tax system is not easy or intuitive for most people to understand.
Accountants spend years learning the IRSâ rules and regulations to help people prepare their taxes. Taking advantage of their expertise may help you to avoid costly mistakes.
If youâre concerned about the expense of hiring an accountant, donât worry. You can actually deduct fees you pay to an accountant to help you prepare your taxes. This means that hiring an accountant may actually save you money.
Like doctors, lawyers, and many other professionals, accountants may specialize in particular areas. Take the time to shop around and find an accountant who knows how to file taxes for small business.
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Annual Report License And Permit Renewals
- Corporations, limited liability companies, and limited partnerships must file an annual report. Profit corporations, nonprofit corporations, limited liability companies, and limited partnerships file their annual reports with the Secretary of State and all services are available online at www.sos.wa.gov/corps.
- Your states business license may have state or city endorsements that are renewed annually. Many specialty licenses, permits, local licenses and professional licenses also require annual renewal. Keep track of your renewal dates to ensure your licenses are current and to avoid extra fees. You may need to check with the individual state agency where the permit was issued.
- Renewal of contractor registration is required every two years, and cost $113.40. You renew your registration with L& I. L& I also renews specialty licenses related to trades .
- Health provider license and facility renewals.
- If you are now doing business in cities and towns where you werent licensed previously, you will need to get additional local licenses. Doing business can include sales, delivery, installation, or service. Contact the cities or towns for further information.
Filing Taxes As A C Corporation
If your small business functions as a C corporation, or if you treat your LLC as one, youâll need to prepare and file a separate corporate tax return with Form 1120, in addition to preparing your personal tax return. The IRS has instructions for filling out Form 1120.
While it can be helpful to have a read-through to make sure you understand the fundamentals, most small business owners choose to hire a professional to complete these forms.
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