First-Time Business Owners: A Brief Guide to Tax Filings
In their book, Start Your Own Business, the staff of Entrepreneur Media Inc. guides you through the critical steps to starting a business, then supports you in surviving the first three years as a business owner. In this edited excerpt, the authors offer a quick guide to help you figure out what taxes you may owe the federal government.
Your federal tax filing obligations and due dates generally are based on the legal structure you’ve selected for your business and whether you use a calendar or fiscal year.
Sole proprietorships. If you're a sole proprietor, every year you must file Schedule C (Profit or Loss From Business) with your Form 1040 (U.S. Individual Income Tax Return) to report your business’s net profit and loss. You also must file Schedule SE (Self-Employment Tax) with your 1040. If you're a calendar-year taxpayer, your tax filing date is April 15. Fiscal-year taxpayers must file their returns no later than the 15th day of the fourth month after the end of their tax year.
You must also make estimated tax payments if you expect to owe at least $1,000 in federal tax after subtracting your withholding and credits, and if your withholding will be less than the smaller of: 1) 90 percent of the tax to be shown on your current year tax return or 2) 100 percent of your previous year’s tax liability.
Partnerships and limited liability companies (LLCs). Companies set up with these structures must file Form 1065 (U.S. Return of Partnership Income) that reports income and loss to the IRS. The partnership must furnish copies of Schedule K–1 (Partner’s Share of Income, Credits, Deductions), which is part of Form 1065, to the partners or LLC members by the filing date for Form 1065. The due dates are the same as those for sole proprietors.
Corporations. If your business is structured as a regular corporation, you must file Form 1120 (U.S. Corporation Income Tax Return). For calendar-year taxpayers, the due date for the return is March 15. For fiscal-year corporations, the return must be filed by the 15th day of the third month after the end of your corporation’s tax year.
S corporations. Owners of these companies must file Form 1120S (U.S. Income Tax Return for an S Corporation). Like partnerships, shareholders must receive a copy of Schedule K–1, which is part of Form 1120S. The due dates are the same as those for regular corporations.
Tax-Deductible Business Expenses
According to the IRS, the operating costs of running your business are deductible if they're “ordinary and necessary.” The IRS defines “ordinary” as expenses that are common and accepted in your field of business. “Necessary expenses” are those that are appropriate and helpful for your business. Following are some of the business expenses you may be able to deduct.
Equipment purchases. Under IRS Code Section 179, expensing allowance, business owners can fully deduct from taxable income a limited amount of the cost of new business equipment in a year rather than depreciating the cost over several years. In 2014, the maximum federal allowance is $25,000. For more information, get a copy of IRS Publication 946, How to Depreciate Property, and read “Electing The Section 179 Deduction.”
Business expenses. Some common business expenses for which you can take a deduction include advertising expenses, employee benefit programs, insurance, legal and professional services, telephone and utilities costs, rent, office supplies, employee wages, membership dues to professional associations, and business publication subscriptions.
Auto expenses. If you use your car for business purposes, the IRS allows you to either deduct your actual business-related expenses or claim the standard mileage rate, which is a specified amount of money you can deduct for each business mile you drive. To calculate your deduction, multiply your business miles by the standard mileage rate for the year. For tax purposes, be sure to keep a log of your business miles, as well as the costs of business-related parking fees and tolls, because you can deduct these expenses.
While using the standard mileage rate is easier for record-keeping, you may receive a larger deduction using the actual cost method. If you qualify to use both methods, the IRS recommends figuring your deduction both ways to see which gives you a larger deduction, as long as you have kept detailed records to substantiate the actual cost method. For more details on using a car for business, see IRS Publications 334 (Tax Guide for Small Business) and 463 (Travel, Entertainment, Gift and Car Expenses).
Meal and entertainment expenses. To earn a deduction for business entertainment, it must be either directly related to your business or associated with it. To be deductible, meals and entertainment must be “ordinary and necessary” and not “lavish” or “extravagant.” The deduction is limited to 50 percent of the cost of qualifying meals and entertainment.
To prove expenses are directly related to your business, you must show there was more than a general expectation of gaining some business benefit other than goodwill, that you conducted business during the entertainment, and conducting business was your main purpose.
To meet the “associated” with your business test, the entertainment must directly precede or come after a substantial business discussion. In addition, you must have had a clear business purpose when you took on the expense.
Be sure to maintain receipts for any entertainment or meal that costs $75 or more, and record all your expenses in an account book. Record the business reason for the expense, amount spent, dates, location, type of entertainment, and the name, title, and occupation of the people you entertained.
Travel expenses. You can deduct ordinary and necessary expenses you incur while traveling on business. Your records should show the amount of each expense for items such as transportation, meals and lodging. Be sure to record the date of departure and return for each trip, the number of days you spent on business, the name of the city, and the business reason for the travel or the business benefits you expect to achieve. Keep track of your cleaning and laundry expenses while traveling because these are deductible, as is the cost of telephone, fax, and modem usage.
Related Book: The Tax & Legal Playbook