A Checklist for Filing Your First Tax Return as a Small Business Owner

2020 was the year that many dreams turned into reality as the health crisis and resulting economic climate spurred many people to start their own businesses. Business Insider recently reported that the number of new businesses applied for in 2020 had reached a 13 year high. If you started your business in 2020, the transition may make you feel apprehensive about filing your taxes for the first time as a business owner, so in this month’s blog we have put together a checklist of items you can use to get prepared.

Gather Formal Documentation

The first thing you will need in order to file your business taxes is formal documentation. Any tax professional will want to know about your products, industry, the state your business is filed in, and the names of any owners. It’s also a good idea to bring the following documents with you:

• Articles of Organization or Incorporation
• The formal name of your business (as registered, if applicable)
• The structure of your business (LLC, Sole Proprietor, Partnership, Corporation etc.)
• FEIN, if one was obtained

Make sure you have all of this ready for your tax professional to avoid any unnecessary time delays.

Financial Documentation

The next, and most obvious, documents to gather are your financial statements. You will need:

• Your profit and loss statement – the financial statement that summarizes the revenues, cost of goods, and expenses incurred during a specified period. For the first year, it is generally from the date business began to the end of the year.
• Your balance sheet – a financial statement for a business that lists assets, liabilities, and equity at a specified point in time, for tax return purposes the last day of the tax period.
• Your General Ledger – a detailed listing of all transactions booked to the accounting system for the year, usually organized by general ledger account number.
• If you have a business that sells products, you will also need to gather an Inventory of Goods (at cost) at the end of the year. This will include goods that are ready for sale as well as any raw materials you have in order to make them.

These are reports you will need to have ready for your tax professional and they should be kept up to date throughout the year. The documents can be prepared manually or you can use accounting software.  Using accounting software may also make it easier for you to see how you are doing at any time during the year.  A major benefit of using the accounting software is that you can run reports instead of having to add up all of your business income and expenses by category for the year. Depending on the software you choose, other benefits may include being able to download transactions from your financial institution, enter a budget into the software, and being able to send a copy of your data file to your accountant.  If you choose online software, benefits could include, online access to the software from multiple locations, uploading your financial transactions in real-time, and giving your tax professional access to your account, so they can pull the information directly from the source data. Note, though, that the reporting function for online software programs is generally less robust than desktop versions.

If you paid employees during the year, your accountant will also want to see your year-end payroll filings to match up wage expenses claimed with wages reported on quarterly payroll tax filings for the year.  If you paid $600 or more to subcontractors/vendors who are not incorporated for services during the year, your accountant will want to see the required Form 1099-NEC(s) that you issued for each subcontractor.

Tax Forms

As we mentioned in last month’s blog, how your business is structured will determine how you are categorized for income tax purposes, and this will in turn determine which tax forms you need to file. Here are the basic business structures and their corresponding forms to fill out:

• Sole proprietor & Single-Member LLC: Schedule C – Profit or Loss from Business which is a supporting schedule attached to your personal Form 1040
• Multi-member LLC & Partnership: Form 1065 for the multi-member LLC or partnership. Each member or partner will receive a Schedule K-1 to report their share of the income from the entity on their personal tax return.
• S-Corporation: Form 1120-S. Each shareholder will receive a Schedule K-1 to report their share of the income from the entity on their personal tax return.
• C-Corporation: Form 1120

Of course, there may be other supporting schedules required, depending on the nature of your business and the type of expenses you are claiming.

Be Aware of Deadlines

Finally, it’s important to note that your structure will also affect the deadline you have to file your taxes. For example, Sole Proprietors, Single-Member LLCs, and calendar year-end C-Corporations usually have until April 15th to file, whereas the deadline for calendar year-end Partnerships and S-Corporations is usually March 15th. Please note these are the filing deadline dates.  You should ask your tax preparer when you need to submit your data to them as they will need time to prepare the return.  One of the reasons it’s great to work with a tax professional from the beginning is that they can help create a strategy that works for your unique industry and will avoid any mistakes such as missed deadlines.

As a first-time business owner, the process of filing your taxes as a business can be tricky. But more importantly, you may overlook something significant that could end up saving you money. Investing in working with a tax professional will likely save you money in the long run and, as a bonus, the fees are tax-deductible. If you’re in need of professional support for your first tax season, you can reach out to our team here.