Preparing your small business taxes starts when you first open your business, since good record keeping will make the entire process far simpler. Tax season tends to be one of the more dreaded times during the business year, and some people even avoid running their own businesses just because of taxes. But as long as you maintain good records and aren't afraid to ask questions, you can prepare your tax returns with relatively few problems.

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Keep Track of Cash In and Cash Out

Regardless of your business form, you're going to have to keep track of the cash in and the cash out. You won't receive a statement from anyone telling you how much taxable income you have, except in a few situations. Even if you are a service-based small business and your clients will be sending in copies of 1099 forms, you shouldn't rely on their bookkeeping. Instead, keep track of all your income and expenses on a day-to-day and week-to-week basis. Save all receipts for your expenses so that you can prove your deductions.

Determine the Proper Format for Filing Your Small Business Taxes

Small business taxes can take on a number of forms. You may need to file as a sole proprietorship, a partnership, or a corporation. If you're a sole proprietorship, you'll generally use Form 1040. If you're a partnership, then you'll also use Form 1040, but you must also file Schedule E. The IRS uses that addition to cross check the incomes reported by the members of the partnership. Corporations must choose the corresponding tax forms based on their corporate status. C Corporations are governed by Subsection C, and S Corporations are governed by Subsection S.

Begin Filling Out the Forms

You will need the following information to fill out your tax forms, though not all of the items will be needed for your business:

  • Gross income from your financial records
  • Sales records
  • Inventory (beginning amounts and ending amounts)
  • Business expenses that are ordinary and necessary to carrying out your business
  • Advertising expenses
  • Business insurance
  • Wages paid (either W2 or W3 forms for employees and 1099 forms if independent contractors)

From this information, use the form to calculate whether you qualify for a net loss or a net profit. If you have a net profit, then you'll need to proceed. If you have a net loss, you may be able to deduct that net loss, but be careful with this. If you report a net loss and claim the deduction for more than three out of five consecutive years, your business may be treated as a hobby business rather than a regular business.

Preparing for tax season may seem stressful, but if you prepare for it in advance, it can be manageable. Keep your records up and save all of the information that you have. It will make it far easier for you to keep up with the tax paying demands. Having the information on hand for the actual filing will also make it easier as you prepare to pay your small business taxes.

Get Started Incorporate your business Answer a few questions. We'll take care of the rest.

Get Started Incorporate your Business Answer a few questions. We'll take care of the rest