Many entrepreneurs are usually overwhelmed when it comes to filing taxes for their businesses. The thought of going about the filing process in and of itself sounds cumbersome especially for people who are not used to doing it themselves. If that is how you are feeling, then you need to know that you are not alone in this. Before the deadline for filing your tax return, you’ll need to prepare yourself the best way you can to make sure you are having an easy time. Especially when it’s your first time filing taxes, there is so much preparation you need to do. You need to know what documents you require and when you will be required to fill your documents. If you have no idea where to begin, you can always seek assistance from experts. When you do some preparation before the year ends, you will be in a position to file accurate taxes and make your payments on time. With that in mind, here are some important factors to keep in mind when preparing for your taxes this year.
1. Documents
When you are preparing your taxes, you need to first ascertain that your documents are in order. When your documentation isn’t organized, there are chances you may prepare an inaccurate tax return. When you are organizing your tax-related documents, you need to have specific things in mind. First, you need to assign expenses. Whenever the business spends some money, you need to make sure the expenses have been properly assigned in your accounting system. You should avoid placing them in the “miscellaneous” account as the expenses will have to be reviewed when the time to file your taxes come. Secondly, you can back-up your files on the cloud because data can easily be lost or disorganized. There are numerous tools you may utilize to save and scan your receipts online. Cloud computing will go a long way in ensuring you have access to all your important files when preparing your tax return. Lastly, you may want to use accounting software to post all your business transactions, making it possible for you to send your files to your accountant. This software is also important if you’re planning to file the returns yourself.
2. Are You a Pass-through?
The available law makes it possible for a lot of passthrough enterprises to deduct twenty percent of their income before they can compute tax liability. In case you are not operating the C Corp, chances are your enterprise is a pass-through entity. The term passthrough implies that the profits and losses of the company flow directly to your tax return. Partnerships, sole proprietorship, and other kinds of businesses are called pass-through entities. For instance, assume that you have a profit of $20,000 from your partnership, the partnership will file a return and the $20,000 is then included in your income on a personal tax return.
It is important to remember that the rules about this deduction are usually intricate especially when it comes to defining “qualifying income.” You should make sure you consult your accountant so they can ascertain if the laws minimize your business tax liability.
3. Lower Tax Rates
The current changes in tax laws lowered the rate of income tax on C Corporations from 35 percent to a flat 21 percent. C Corporations are usually subject to double taxation since the profits are taxed on the owner’s tax returns as well as the corporate tax return. Consider the following scenario: a corporation files its tax return and pays its profit taxes. The owner of the corporation can retain the profits and use them in the business or can choose to pay cash dividends to the shareholders. If the latter occurs, the dividend income is included in the personal tax return of shareholders. In this case, the owner of the business is also a shareholder.
With that in mind, when you are preparing for your taxes, make sure you check with the accountants to ascertain what the business structure for your company is and whether or not a lower tax rate is applicable in your case.
4. How do you Handle Entertainment?
According to the new rules, entertainment expenses are now non-deductible. Any activities that are considered to be purely for amusement, recreation, or entertainment are ineligible for deduction according to Section 274 (a). This deduction was common for many businesses, and this change will likely affect small businesses. As a business owner, when you take a customer for an event such as sports, the costs involved are no longer considered deductible.
This change doesn’t affect a lot of other costs relating to the business. For instance, you can still deduct your meal costs during business travel (up to fifty percent). However, depending on the interpretation of statutes, some meals with business contacts and clients may be considered entertainment. For that reason, you need to find a tax accountant who is acquainted with the current information on deductions, so you can know how your taxes are to be handled.
5. Self-Employment Tax
There a lot of confusion when it comes to self-employment tax and many companies fail to deduct the correct amount of taxes for self-employment. Through payroll withholdings, employees pay their Medicare and Medicaid taxes and the withholding gets reported in the W-2 form. With self-employment tax, the employer contributes a portion of it and it is considered a business expense.
In case you are self-employed, you will need to pay both the employee and employer portion then deduct the latter on your personal tax return. Since this can be a huge deduction, it is imperative to have your numbers right. Contact your accountant to verify whether the deduction amount is accurate.
Final word
Taxes do not need to be stressful. Knowledge yields power and knowing your taxes translates to the power to save. Even when you choose to work with an accountant, you are the only person who knows your financial situation better. The more you are aware of your deductions, the more you can save as a business. Therefore, you need to learn about the types of deductibles you qualify for so you can file your tax returns accurately.
