How to File Small-Business Taxes: Tips From the Pros

Tax season can be a scary time for unprepared businesses, but these tips will make it as smooth as possible this year and next.

Note: This article is intended to inform our readers about business-related concerns in the United States. It is in no way intended to provide financial advice or to endorse a specific course of action. For advice on your specific situation, consult your accountant or financial consultant.

The end of the year can be a scary time, with shorter days and longer nights. If you’re a business leader with responsibility for your firm’s accounting, the end of the year can be even scarier for entirely different reasons: Tax preparation season looming around the corner.

Of course, if you’ve been using up-to-date accounting software all year and you have a long-time, trusted tax professional on the job, you can avoid the fear. But even if you don’t, don’t panic: There are still a few tricks you can use to salvage this year’s tax season and make sure that next year goes even smoother.

We talked to a number of CPAs and small-business leaders from across the country to get their advice on how to file your taxes accurately and thoroughly, and this is what they said.

How to file small business taxes

The most sound advice we can offer when it comes to preparing your small-business taxes is to use accounting software early, and often.

Accounting software—when paired with a good tax professional—keeps all necessary information in one place, offers all the tax forms you’ll need, and helps you take advantage of every possible deduction and credit, just for starters.

But there is more to filing your taxes than clicking a few buttons and calling it a day.

Tax law is complicated and ever-changing, and small-business leaders need to be ready when tax time rolls around to make sure they’re not paying the government more than they owe, or worse yet—wittingly or unwittingly committing tax fraud.

Steve Hocheiser

Hocheiser CPA

“You could find yourself subject to penalties and interest from underpayment of taxes. This can come from either errors in preparation of the return or failure to make the required estimated payment.”

You may be thinking that you can save some money by doing your taxes yourself or skimping on accounting software, but isn’t the peace of mind that comes from knowing your taxes were done accurately worth a modest investment?

Mistakes on your tax return can also lead to the dreaded IRS audit.

While only about one in 100 businesses are audited annually, chances spike if a small business earns more than $1 million each year, fails to report all of its income, or claims business deductions that are disproportionate to its income.

5 tax tips from the pros

Keep in mind that this guide is not a comprehensive, step-by-step manual on how to prepare your taxes. These tips assume that you already know the basics:

• All of the information you need from your business.
• All of the tax forms you need from the IRS (if your accounting software can’t handle this part for you, it’s time to upgrade).
• Your deadlines for filing.

Once you’ve got that down, you’re ready for these next steps.

1. Track down all of your income and expenses

If you’ve been using accounting software all year, this should be as easy as running a few reports. If not, you have a little more work to do.

Most of your income likely comes from sales, but don’t forget to factor in capital gains as well—stock profits, mutual funds, or real estate sales, for example. If you fail to report these sources of income, you’re liable to be audited and end up paying those taxes along with a penalty.

On the other hand, if you fail to report all of your expenses, you risk paying the government more than you actually owe because you’re missing out on deductions.

CPA Irene Wachsler says that one of the most common mistakes she sees with small businesses when it comes to tax prep is neglecting to reconcile their spending against their bank statement every month, causing incidental expenses such as eligible meals and supplies to slip through the cracks.

“These small expenses add up,” she says.

2. Be aware of the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) of 2017 is the biggest tax overhaul in decades.

“This year had the most significant changes that I have seen,” says Hocheiser.

The good news is that, if you successfully navigated the TCJA in 2018 and 2019, you don’t have to worry about anything new this year. You have until the end of 2022 to take full advantage of bonus depreciation by investing in your business.

Accounting software will handle the new rates, and your tax professional can let you know all the ways that the TCJA will affect your business. It still pays to know the main points, however, especially if you’re preparing your taxes on your own.

Here are some of the main takeaways of the TCJA, from our recent article on the biggest challenges facing small-business accounting professionals in 2019:

• Bonus depreciation: This new tax rule allows businesses to deduct 100% of the depreciation on business assets such as vehicles, computers, and other equipment right away for any purchases made before January 1, 2023, making this a great time to invest in your business.
• Paid family and medical leave tax credit: There is a new tax credit for employers that offer paid family and medical leave to their employees.
• Cash method of accounting: Many more small businesses (those with $25 million or less in annual gross receipts instead of the previous marker of $5 million or less) are eligible to use the cash method of accounting, which is typically simpler and less expensive than accrual accounting.
• Pass-through entities: Most small businesses are considered pass-through entities, including S corporations and LLCs, and they can now deduct up to 20% of qualified business income.

While that 20% deduction may seem enticing, making the leap to an S-corp or LLC may not be worth the squeeze, warns CPA Logan Allec.

Logan Allec

CPA

“Sometimes, remaining a sole proprietor for tax purposes—meaning that you simply report your business income on your personal tax return—is the most advantageous route. The extra administrative costs of having your business taxed as an S corporation may not outweigh the tax savings. This is why it’s important that you get personalized tax advice from a qualified tax professional.”

3. Take advantage of every possible deduction

One of the biggest advantages of working with a small-business tax professional and using accounting software is finding deductions that you never knew existed. You can—and should—deduct every expense related to running your business: from a home office to mileage on your car to research and development costs.

To do so, keep track of everything, and separate business expenses from personal ones. This is an area where an expense tracking app (included in most accounting software) is incredibly helpful.

CPA Jeffrey S. Levine says that fear of an audit prevents many small businesses from taking deductions that they actually deserve.

Jeffrey S. Levine

CPA

“Making incorrect assumptions, such as not deducting a home office or not realizing other items, such as health insurance or pension contributions, may be deductible … the biggest danger is paying more tax than necessary,”

Every small business is different, but here’s a list of small-business tax deductions from Bench to give you an idea of deductions you may be missing out on.

4. Contribute to a retirement plan

Just because we’re nearing the end of the year doesn’t mean you can’t take advantage of some tax savings right now. Multiple CPAs recommend tucking away any surplus cash (up to $55,000) into a Simplified Employee Pension Individual Retirement Account (SEP IRA).

“A business of any size, even self-employed, can establish a SEP,” according to the IRS.

The easiest way to set up your SEP IRA is through your bank, insurance company, or other financial institution like an online investment firm. Here is a basic guide for establishing an SEP from the IRS.

Stacy Caprio

Small-business founder and manager

“[SEP IRA contributions are] put in tax free and removed from your taxable profit, so not only is it a great way to save for retirement, it helps you save on taxes in the present as well. Any small-business owners not doing this are missing out.”

5. Keep an eye out for tax credits

Tax credits are different from tax deductions. In fact, they’re better than tax deductions.

Sarah Hancock

Chief editor, Best Company

“Tax credits reduce your potential taxes on a dollar-for-dollar basis while deductions reduce your taxable income so their net effect is savings equal to your tax rate. From a tax perspective, credits are more valuable than deductions.”

In other words, tax deductions reduce the amount of your income that is taxable, while tax credits directly reduce the amount that you owe.

Common tax credits to look out for include the Disabled Access Credit, Electric Vehicle Credit, and Work Opportunity Credit.

Here is a complete list of business tax credits for small businesses and self-employed individuals from the IRS.

Just like deductions, your tax software or tax professional can walk you through the process of redeeming your earned tax credits when you file (assuming you have earned the credit by purchasing an electric vehicle or providing childcare facilities, for example).

What are your small-business tax prep tips?

Of all the tips we heard from CPAs, the most helpful may be the most obvious:

1. Stay on top of your tax preparation year-round
2. Use professional help when necessary

What are your best tips for taking the stress out of tax prep? What are your biggest challenges? Share them in the comments below, or find me on Twitter.

Once you have your tax prep under control, why not look into some more ways to get your accounting and finances in order? Follow our blog for a steady stream of tips on everything from payroll to podcasts.