It can be tempting to try to save some money by preparing your business taxes yourself. Maybe you've been paying tax professionals for years and you're starting to wonder about the expense, or you just launched your new business this year. But take a deep breath first.
Ask yourself if you really understand tax law. Honestly assess whether you know what forms you must submit with your return, when you must submit your return, and how you're legally entitled to shave some dollars off your tax liability. Make sure you understand all the implications of recent tax law changes.
The Tax Cuts and Jobs Act seriously upended things in 2018 for both individuals and businesses.
Finally, understand your options. You might not need a CPA. You might only require some tax preparation software.
When Can You Do Your Own Business Taxes?
You can always attempt to do your own taxes, or you can use business tax preparation software. Ultimately, whether you can successfully pull it off depends on your business type, its complexity, and your tax experience.
Business filing requirements range from submitting an additional form or two with your personal tax return to completing a corporate income tax return.
Look at the tax form that's appropriate for your enterprise and decide what information you'll need to complete it and where you'll get it. Most will come from your financial statements, including your balance sheet and income statement.
You might need additional information to complete tax return sections for things like cost of goods sold and your home business space.
Sole Proprietorships and One-Person LLCs
Sole proprietors and one-person small businesses, including one-person limited liability companies (LLCs), can complete Schedule C to calculate their business incomes and include that form with their personal tax returns. It's relatively simple.
You have a sole proprietorship if you own and operate your enterprise yourself. You might have one or more employees, but you don't have any co-owners and you haven't taken any steps to incorporate or form another business structure.
You have a single-person LLC if you've chosen this business formation as a legal barrier between yourself and your business debts and liabilities, but you have no co-owners.
Business income and losses "pass through" to you and your personal return with these business types.
A simple Schedule C for a sole proprietor is a lot different from a complex corporate or partnership tax return. If Schedule C includes the manufacture or sale of products that requires a cost of goods sold calculation, it gets more complicated, and there's more possibility for error.
You might be just fine handling your own return if you have a very simple Schedule C operation with no employees and no products, and the IRS does make this a little easier for you in one respect. You can use the simplified calculation for the home business space tax deduction if you meet certain requirements.
The simplified home office calculation allows you to claim $5 for each square foot up to 300 that's dedicated exclusively to your business.
Partnerships and Multiple-Member LLCs
Partnership and multiple-member LLCs are more complicated because they involve both a separate business tax return and a statement on Schedule K-1, showing each owner's share of the profits or losses. Partnerships have two or more owners and must file the Form 1065 tax return.
Preparing a tax return for a partnership or LLC first involves the calculation of income or loss, then this distribution of that income or loss to the partners or LLC members. This gets trickier and increases the possibility of error.
The Self-Employment Tax
You'll have to calculate and pay the self-employment tax—Social Security and Medicare—based on your business income if you own a sole proprietorship, partnership, or LLC. You're considered self-employed within all these business structures.
Normally, you and your employer would each pay one half of your Social Security and Medicare tax obligation. You must pay both halves as the self-employment tax if you don't work for an employer.
Add your business income and your self-employment tax calculation to your personal tax return if you're considered self-employed and filing Schedule C.
The Qualified Business Income Tax Deduction
The Tax Cuts and Jobs Act gave some businesses a nice tax gift in 2018, and you should understand this as well before you wade in and attempt to prepare your taxes yourself.
The Qualified Business Income Deduction allows non-corporate enterprises to subtract 20% from their taxable incomes. But there are some conditions, and they might be tricky to handle if you don't have a good understanding of tax law. For example, income limits apply if "the principal asset of a trade or business is the reputation or skill of its employees or owners," according to the IRS.
You might also have to deal with excise taxes if you sell or manufacture certain products, use certain types of equipment or facilities, or receive payment for certain services. This obligation comes with a whole additional set of forms and rules, and you'll almost certainly need the help of a professional to master them.
Preparing a Corporate Tax Return
Corporate tax returns are the most complicated because they include shareholder information and several complicated schedules.
C corporations are separate legal entities from their owners, although S corporations are considered to be pass-through entities like sole proprietorships and partnerships, with income and losses reported on shareholders' and owners' personal returns.
C corporations effectively pay taxes on their incomes twice—once at the corporate level, then again by the shareholders or owners on their personal tax returns for their shares of that corporate income. They can avoid the self-employment tax, however, if they actively participate in the business.
A corporate return becomes particularly complicated if the owners work in the business.
C corporations must file the Form 1120 tax return. S corporations must file Form 1120S, although this is an informational form, not technically a tax return because S corporations are pass-through entities.
Some Things to Consider
Consider the cost of hiring a tax preparer versus the cost of tax software. Several of the business tax software programs come with online support from CPAs or Enrolled Agents who can help with questions, but some might not be trained or experts in business taxes as opposed to personal taxes.
A tax professional who is knowledgeable about business taxes might cost more, but they might be able to find loopholes that can save you money.
It's possible to do the return yourself using tax prep software if you must calculate cost of goods sold, but getting the help of a business tax professional is probably best in all other cases.
It can be valuable to you as a businessperson to get tax advice on an ongoing basis, throughout the year and not just before tax time. This will help keep your tax liability as legitimately low as possible.
What to Look for in a Tax Preparer
You'll want someone in your corner if you get an audit notice, so find out if the professional you're considering hiring can represent you before the IRS. Not all can. Some can go with you to an audit, while others can actually go in your place and spare you the ordeal.
Enrolled preparers are registered with the IRS and can sign tax returns and help with tax audits. Unenrolled preparers can't do either of these things. An accountant who is not a CPA is considered to be an unenrolled preparer.
Enrolled agents have earned this designation through a rigorous test of tax law and are specifically employed to help with tax issues. CPAs are accountants who have passed a licensing exam in the state in which they practice. CPAs can deal with accounting and payroll issues in addition to tax issues.
You're ultimately responsible for your tax return no matter who does your taxes, and you alone are answerable to the IRS if the return is fraudulent or inaccurate. It's something to keep in mind.