Filing income taxes for a small business is not an easy task for someone without tax experience, but it can be done. The procedures for the actual process, regardless of the organization of the business, don't vary that much. The difference is in which tax forms are used to actually file with the IRS. Computing the necessary information to find taxes owed requires accurate accounting that will include details of revenues and expenses for the business.
Things You'll Need
- Profit and loss statement
- Balance sheet
- Division of ownership by percentage
- Fixed asset worksheets
- Information on the amounts originally invested into the company by the owners
Determine how your small business is organized according to IRS definition. There are several ways to organize your small business for the purposes of taxation. These ways include sole proprietorships, partnerships, S-Corporations and C-Corporations. Many business owners have taken advantage of a relatively new form of business known as a Limited Liability. This designation, however, has little to do with how a business is taxed. An LLC or LLP simply limits the liability of an owner to the amount of money he has invested into the company. The LLC protection can be placed onto an existing business regardless of which designation is used.
If you form a company and don't choose the organization, the IRS will consider unincorporated businesses with one owner as sole proprietorships and companies with more than one owner as partnerships. If you have taken the extra measure of incorporation, and have not chosen an S-Corp election, the IRS will consider your business as a C-Corp for tax purposes.
Gather the profit and loss statements, the balance sheet and all documents regarding the ownership percentages and original investments of the owner(s). If your business is a sole proprietorship, you will use these documents to fill out what is called a Schedule C, which will be part of your individual 1040 Form. These taxes must be filed by April 15th.
If your business is partnership you will be filing a Form 1065. The resulting profit or loss is reported to each partner on a Form K-1 and is divided according to the percentage of ownership of each partner. These taxes are due to be filed by April 15th.
If your business is a C-Corp, you will be filing a Form 1120. From a C-Corp, taxes are paid on the revenues of the corporation. In addition to that, if the shareholders (owners) have taken a distribution from the business, they will be taxed on the distributions on their personal return. The Form 1120 is due on March 15th, 30 days earlier than the individuals' personal return.
If your business is an S-Corp, you will be filing a Form 1120S. The major difference between the C and the S is that the S-Corp is what is known as a pass-through entity. The profit or loss "passes through" to the shareholder's personal return and avoids being taxed twice. This return is, like the 1120, due on March 15th.
Fill out the appropriate form. You will use all of the same documentation to complete the return regardless of how the business is organized. The corporate returns make more use of the balance sheet information than the sole proprietorship and partnership do. Since there are so many forms needed for corporate returns, using tax preparation software or asking a professional for help would not be out of line. The Schedule C is the most straightforward and easiest of the four to use. All of them involve the reporting of revenues in the upper part of the form and expenses in the lower part. For the return to be completed, remember that you will need to ensure that the balance sheet balances out. The amount in the assets section must match the amount in the liabilities and equity sections.
Calculate the depreciation on fixed assets. Fixed assets are assets that a company does not plan on disposing of in less than one year. Vehicles, buildings, machinery and equipment are included in that list. Depreciation represents the amount of money every year that is lost due to normal wear and tear on the asset. A $2,000 computer has an expected lifespan of three years. At the end of the third year, the computer will be worth zero dollars. The value of the computer will be decreased by $666.66 each year. Use the small business guide on depreciating assets to help calculate the correct amount to write off in expenses.
Tips & Warnings
- If filing taxes for your business involves any types of prepayments for payroll taxes, make sure these forms (W-2s, 1099s, etc) are filed and sent by the end of January of the following tax year. Forgetting to do so can lead to fines and penalties.
- Photo Credit A young woman holding a pen, doing her taxes image by Christopher Meder from Fotolia.com