It's probably fair to say that most small business owners don't look forward to doing
their taxes, but it's something that we all have to deal with.
I'm Priyanka Prakash, small business expert and senior staff writer at Fundera.
If you have questions about finding your business taxes or have made business tax mistakes in
the past, you're not alone.
More than half of small business owners admit that tax filing is complicated, yet nearly
half still handle business taxes on their own.
To help you out, we asked small business owners around the country for their burning business
tax questions.
We’ll cover the answers today so you can avoid costly, time consuming business tax
mistakes, and feel more confident about tax preparation.
Question one is from Dane Kolbaba, owner of Watchdog Pest Control.
Dane asked, “What tax forms should a small business owner use, and when is my tax return
due?”
This is a great question to start with.
A common business tax mistake is using the wrong form or missing a tax deadline.
You'll need to fill out different tax forms depending on how your business is structured.
Plus, each tax form has a different filing deadline.
In general, you'll use the following forms and tax schedule.
A sole proprietor has to file Schedule C by April 15 of each year, along with their personal
tax return.
For a partnership, the business has to file form 1065 and schedule K-1 by March 15.
Each partner files their personal tax returns by April 15.
An S-corp files form 1120S and schedule K-1 by March 15, and shareholders file their personal
tax return by April 15.
For a C-corp, the business files form 1120 by April 15.
An LLC is would follow the rules for the type of business entity that they are taxed as.
For example, if your LLC is taxed as an S-corp, you use the same forms as an S-corp and follow
the same deadlines.
Keep in mind that these dates can change by six months if you file for an extension with
the IRS.
You can file a request for a tax extension using either form 4868 or form 7004, depending
on the type of business you own.
Also, remember that the due date for filing your tax return is not necessarily the due
date for paying your taxes.
When you're self employed, no one withholds income tax from your pay.
As a result, you have to pay estimated taxes each quarter directly to the IRS.
Our next question is a nice follow up to the first one.
Question two is from Linda Formichelli, founder of Hero's Journey Content LLC.
She asks, “What's the best legal structure for small business from a tax standpoint?”
Good question, Linda.
There are tax pros and cons to each type of business structure.
If tax simplicity matters most to you, consider a sole proprietorship.
With a sole proprietorship, all business income just gets reported on a schedule C along with
your personal income taxes.
This is called pass through taxation, and the business income is subject to your personal
income tax rate.
The same goes for partnerships, which are also pass-through entities, except the business
income and the share of taxes paid gets divided among multiple owners.
S-corps are also pass-through entities, but come with one big tax advantage.
A shareholder who actively works for an S-corp is considered an employee of the S-corp, and
only their salaries are subject to self employment taxes.
Distributions outside of salary, also called dividends, are not subject to self employment
taxes.
A C-corp is the only type of business entity that pays a corporate business-level tax.
If you take dividends from the business, those get taxed again to the shareholders on their
personal tax return.
This is called double taxation.
Although double taxation is a disadvantage of C-corporations, c-corps are also eligible
to take more tax deductions that other types of businesses.
In addition, c-corps are a good choice for small business owners who want to retain and
reinvest earnings in their business.
And finally we come to the LLC.
For many small business owners, an LLC is the best choice from a tax standpoint because
you can choose how you want to be taxed.
A single-member LLC can be taxed as a sole proprietorship, S-corp, or C-corp.
A multi-member LLC can be taxed as a partnership, S-corp, or C-corp.
Our next tax question is from Andrew Schrage, CEO of Money Crashers.
He asks, “Is it a tax mistake to mix personal and business expenses?
If I take money out of the business account for personal expenses, can those expenses
be deducted on my tax return?”
This is a great question and an issue that trips up many small business owners.
Mixing personal and business expenses can make your taxes harder to file and even trigger
an IRS audit, so it's something you should avoid.
This is because business owners can only deduct ordinary and necessary business expenses.
So, for example, if you pay for a dinner out with your spouse using your business credit
card or business bank account, you cannot claim that expense as a deduction on your
business taxes.
Sometimes, however, business owners mix work and leisure.
For example, let's say you take a trip to Los Angeles.
Part of the time you spend on sightseeing and the other part you spend on visiting clients.
You can only deduct the trip expenses that are associated with your business, and you
should save receipts from any business purchases.
If you're planning to deduct rental car costs or fuel costs, you'll want to use a mileage
tracker app to separate business from personal use.
Now of course there are times when you'll need to access money from your business to
pay for personal expenses.
In these situations, you have a few different options.
You can put your self on payroll as an employee if you have
a corporation, write a check to yourself as a distribution if you have a corporation,
or for other business types, schedule regular draws from your business bank account.
Question four is another one from Andrew Schrage of Money Crashers.
He asks, “Can anyone solve the mystery behind the home office deduction?
What is deductible, and what isn’t.
Will you trigger an IRS audit if you take it?”
If you use part of your home for business, whether you rent or own your home, you can
claim the deduction from the IRS.
Your home office must be used exclusively for business purposes to qualify, and it must
be your company's principal place of business.
If you put a desk in your living room, for example, that might qualify, but you can't
use it for personal reasons such as letting your kids do their homework there.
There's an easy way and a more complex way to calculate the home office deduction.
The easy way is to claim a standard deduction for home offices up to 300 square feet by
multiplying an IRS provided rate by the square footage of your office.
This rate can change from year to year, but if it's $5 per square foot, for example, then
you can claim up to $1,500 in home office deduction.
The harder way is to calculate and claim home office-related itemized deductions, such as
the amount of money spent on mortgage interest, taxes, repairs, insurance, and utilities as
relates to your home office.
For example, if you spend $1,000 on property taxes for your entire home one year, and your
home office takes up 20% of your home's square footage, you can deduct $200 as a home office
deduction.
If you use this more difficult calculation method, you'll have to account for depreciation
on your home.
You'll also want to save receipts and records on all of your home-related expenses.
Finally, don't worry about an IRS audit creeping up on you if you take the home office deduction.
In reality, a very small fraction of small business owners get audited.
Our fifth question is from Marsha Kelly, president of Best4Businesses.com.
She asks, “Should I choose a calendar year or a different tax year for my seasonal business?
How will this affect my taxes?”
Good question, Marsha.
Some businesses don't follow a typical January to December calendar year.
For example, if you own a landscaping business, you'll generate the majority of your revenue
in the spring and summertime.
In general, tax filing rules are the same for seasonal and non-seasonal businesses.
However, some unique tax issues might come up for seasonal companies.
Even if most of your revenue is produced during the summer, for instance, you might incur
expenses during other times of the year.
You might have to pay legal fees to a lawyer or a consultant, for example.
Those are still deductible business expenses that you can claim when you file your tax
return, so be sure to save records of those expenses.
And you still have to make estimated tax payments to the IRS each quarter if you expect to owe
the government $1,000 or more when you file your annual return.
Our last question is from Lucy Harris, owner and CEO of Hello Baby Bump.
She asks, “Is it hard to do my own taxes?
Should I just stick with my accountant?”
We recommend that small business owners always have their tax returns prepared and reviewed
by an accountant, CPA, or other tax professional.
Eighty four percent of small business owners spend more than 40 hours per week on their
business responsibilities.
That means there isn't a lot of time left to think about taxes, so it's best to leave
it to the professionals.
A pro can help ensure that you file the correct tax forms by the correct deadlines, take all
deductions and credits that your business is eligible for, properly report all profits,
and keep an accurate paper trail (which comes in handy on the slim chance that you're audited).
And those are six questions that will help you avoid some of the most common business
tax mistakes.
We hope this was helpful and makes tax season a little less stressful.
For more business tax information and other small business tips, check out fundera.com.
You can also go to youtube.com/funderaloans, and don't forget to subscribe to our YouTube
channel.
Thanks for watching everyone, and let us know in the comments if you have any other business
tax questions.