Running your business affords you the opportunity to use your expertise and learn from your mistakes. Preparing taxes for your business does not provide the same opportunity. The Internal Revenue Service scrutinizes your business tax returns whether you or a licensed professional prepare them. With some guidance, save money by preparing them yourself.
Things You'll Need
- Profit and loss for date range of your tax year
- Balance sheet for the date your tax year ended
- Proper business tax forms (1040 Schedule C, 1065, 1120S or 1120)
Determine the tax form you need to use to report your business activity. Sole proprietorships use schedule C with your form 1040 personal tax return, partnerships use form 1065, S corporations use form 1120S and corporations use form 1120. Once you have determined the correct tax form, begin recording information from your financial statements to the tax return.
Complete the informational portion of the tax return. Your information section varies by specific tax return form, but all forms designate primary information at the top of page one with letters rather than numbers. Primary information includes business name, business address and tax identification number. Other information includes accounting method, industry code and incorporation date. Complete the questions for partnerships, S corporations and corporations, on pages two through four. For detailed instructions on each business tax return form, consult the Internal Revenue Service (see resource 1).
Locate your book income at the top of your profit and loss statement. Record gross receipts, or sales, on line one of your business tax return. Transcribe cost of goods sold, if applicable, below gross income on the appropriate line. Place other income at the bottom of the income section below cost of goods sold. Subtract cost of goods sold from gross income and then add other income to attain your total income or loss. Verify total income on your tax return matches total income on your profit and loss. If so, move to deductions.
Fill in the deduction section of your tax return with expenses from your profit and loss. For expenses not on your tax return, create a statement and total the listed expenses at the bottom of the deduction section on your tax return. Record tax-only deductions not recorded in your books. These deductions include depreciation not in the books, special bonus depreciation and section 179 elections. Calculate your depreciation by recording all fixed assets from your balance sheet and using form 4562 (see reference 1). Place final depreciation and election figures in the appropriate fields on your tax return.
Reconcile your profit and loss back to your tax return for income and expenses. Add back tax-only deductions and disallowed deductions to arrive at your net book income. If you file a schedule C with your personal form 1040 tax return, you are done. If you filed another business tax return, proceed to your balance sheet.
Copy your balance sheet data to the balance sheet on your business tax return, which is on page four or five, depending on the specific tax return you are filing. Reconciliation on the tax return follows with section M1 and M2. Reconcile your book balance to tax balance, and retained earnings to the balance sheet. Complete ancillary forms where necessary.
Tips & Warnings
- Place a checkmark or slash next to each item on your profit and loss and balance sheet you record on the tax return Circle your financial statement numbers you reconciled to the tax return Make notes on your financial statements when you lump expense or income categories together Use tax return software to depreciate your fixed assets Make journal entries in your books to reconcile your books to the tax return each year
- Know the tax return form you are required to file Remove nondeductible items from your profit and loss before starting your tax return
- Photo Credit Jeremy Slaughter: personal collection
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