Business Income Tax Preparation and Filing Questions
Filing Returns, Taking Business Tax Deductions, Forms
- Do I have to file a business tax return?
- Can I use tax software for my business taxes?
- How do I calculate business income?
- How do I find business deductions?
You'll find answers to these and other questions about preparing your business taxes, in this article.
The 2020 pandemic has created several new tax credits and other tax-related relief for businesses and individuals. See this article on how COVID-related law changes may affect your 2020 tax return.
Before you begin working on your business taxes, review the business tax changes from the 2017 Tax Cuts and Jobs Act:
- A new 20% deduction on net business income, called a Qualified Business Income (QBI) deduction, in addition to expense deductions
- Removal of some deductions, including business entertainment expenses
- Higher depreciation allowances, and
- A new Family Leave Act Tax Credit available to small businesses (extended through 2020) that offer family medical leave benefits to employees.
The answer is always "YES." If you have income and fail to file an income tax return, you may incur fines and penalties from the IRS. Even if your business has a loss, or your business was inactive, you must file a tax report. A business loss may actually help you because it can reduce your total income on your personal tax return.
You must report all business income, including income reported on Form 1099-NEC as an independent contractor, on your personal tax return. So it just makes sense to take allowable deductions to decrease your taxable income. It doesn't take much to be a "real" business; you just need to operate as a business, keep business and personal records separate, and show you are trying to make a profit.
Tax software is focused on personal tax returns, but most of the top business tax software programs have versions that include Schedule C (for sole proprietorships and single-member LLCs). Some also have versions that guide you through the process of preparing partnership and corporation tax returns. Check the details for the brand of software and the version to make sure that the form you want is included.
If you have a simple Schedule C tax return, you may be able to use tax software or complete the form yourself, if you know what you are doing. But what if you miss something? Missing an important deduction can cost you money and cause you to pay higher taxes.
You must also complete Schedule SE for self-employment taxes (Social Security and Medicare tax for business income) and include those taxes in your personal tax return.
Partnership and corporation tax returns are complicated. They involve preparing a separate tax return for the business and then a schedule K-1 for each shareholder or partner. And there are many pitfalls along the way.
You can find a CPA or get help from a qualified business tax preparer, like an Enrolled Agent. In any case, it's often worth the money to get help with a business tax return.
Before you prepare your business tax return, you will need to put together an income statement, often called a "P&L" or profit and loss statement. This statement lists all sources of business income, then shows all the expenses. Income minus expenses equal net income. You must also include barter income on your business tax return.
If you are preparing a business tax return for a business that makes or sells a product, you will need to include a cost of goods sold calculation, to show the change in the value of goods over the year's time.
Almost all business expenditures are tax-deductible, as long as:
- You can prove that you are in a legitimate business and attempting to make a profit, and
- You can prove the business purpose for each expense.
Keeping excellent records is the key to deducting business expenses. The most common error made by business owners is not keeping records for business mileage and for meals and entertainment expenses.
Some expenses cannot be deducted by a business because the IRS does not consider them legitimate business expenses. For example, political contributions, fines and penalties, membership at a social or sports club, and commuting costs cannot be deducted. Read more about business expenses that cannot be deducted.
Every taxpayer pays Social Security and Medicare tax on income. Employees pay this tax (called FICA tax) through withholding, and their employers pay the other half of the required amount of tax. Self-employed individuals pay the entire amount of this tax (called SECA Tax) by paying self-employment tax on the net taxable income of their business.
To find out if you must pay self-employment tax, you must know whether you are an employee or a business owner. If you own and run a small business, you are a business owner and you pay self-employment tax. Partners and LLC members are included in this category.
If you are a shareholder or officer in a corporation, you are also an employee, and you pay FICA tax on your salary. You don't pay self-employment tax.
The Social Security portion of self-employment tax, like Social Security tax paid by employees, adds to your eligibility for Social Security benefits when you retire or if you become disabled.
Your portion of business tax is included in your personal income tax return, depending on the type of business you own.
When doing small business taxes, owners file a Schedule C for each business they own, and the net income from this Schedule C goes on Line 12 of the first page of your personal tax return (Form 1040 or 1040-SR). So, the income from your business is directly taxable to you, at the same rate as your other income.
Owners of partnerships (including members of multiple-member LLCs filing as partnerships) receive a Schedule K-1showing their share of the partnership's tax liability. Schedule K-1 income is included on each partner's income tax return and is taxed along with other sources of income.
In the same way, owners of corporations and S corporations also receive a Schedule K-1 showing their share of earnings from the corporation, and the K-1 income is included on their personal tax returns.