CPA Allan Madan gives New York International readers a helpful checklist for tax time.The tax deadline is coming and many entrepreneurs and small business owners fail to adequately prepare ahead of time. Luckily, we have made a simple list of tips and advice that you should be taking into account when preparing for your tax return. This should help ensure that you maximize your return. As a small business owner myself, I know that every dollar counts!
Unincorporated Small Business Owners and Freelancers
Most small business owners and entrepreneurs tend to be unincorporated and will fall under this category. Americans are required to complete Schedule C of the 1040 US personal tax return (due April 15th). In order to maximize the possible benefits of being a small business owner, you should be proactive instead of reactive. Understanding what is, and what is not, deductible can dictate how records are kept throughout the year, so it’s not a nightmare during tax time. Here is a general list of tips and advice on what you should prepare before filing your business tax return:1.) General InformationAll of your basic information needs to be provided. This includes social security number, business name/address and fiscal year end.2.) Proper Documentation for Expenses
Accurate documentation is the most important for deducting eligible expenses. In fact, the Internal Revenue Service (IRS) requires that you have sufficient documentation (receipts, invoices) for any business-related expenses. These documents should clearly show vendor name, date, and amount; they are required to be kept for a minimum of six years for legal reasons. It is important that you not only keep all receipts for expenses you expect to claim but also all business expenses as they may become deductible in the future. Some common expenses you can normally claim include:
- Meals and Entertainment (business related)
- Accounting or Lawyer Expenses
- Office supplies
3.) Bookkeeping and Financial StatementsAlways ensure that your bookkeeping records and financial statements are up to date and in hand. This will make it easier to complete your return. If you are using the services of an accountant, they will normally require your bookkeeping records and financial statements which should include: journal ledger, trial balance, as well as your income statement and balance sheet.4.) Home Office Deduction – Simplified MethodIf you are a small business owner that uses a portion of your home as an office, you are eligible for the lucrative home-office deduction. Claiming this deduction just got easier for the 2013 tax year with the introduction of the simplified method. Under this method, the deduction is calculated by taking the area of the home office and multiplying it by $5 per square feet up to a maximum of 300 square feet and therefore capped at $1,500. To reiterate our earlier point, it is extremely important that you have the proper documentation for verification processes. This means having a floor plan, receipts for business related office payments such as rent, utilities, property taxes, insurance, and maintenance fees. This also includes having proper document that shows that the office is for the convenience of the employer (you) and that it is used regularly for business purposes.5.) Vehicle Deduction for Business PurposesAnother significant deduction for entrepreneurs is business related expenses through the usage of your vehicle. If you have a vehicle that you use for business purposes, then you will be able to deduct the costs that are related to operating that specific vehicle. Business related activities include driving from your office to another work site, to meet with a client, or to a business meeting. It is essential that you maintain a log as well as the accompanying receipts to track your mileage. The IRS will not let you claim this deduction without these items. Luckily, mobile technology has provided us apps for electronic logs.You can also claim the following expenses related to your vehicle:
- Fuel and oil costs
- Lease payments
- Parking fees
- repair and maintenance
- insurance
6.) Sold or Purchased Assets During the YearAs a business you will often have assets sold or purchased throughout the year. Again, make sure that you have the proper documentation including receipt and cheque as this will be needed to prepare your return. These documents are also needed in case the IRS ever decides to audit your return.These are just a few tips on how you can prepare for your business income tax return in the United States of America. If you would like more information on other deductions you may be entitled to as a small business owner, read our article on tax tips for the self employed.
Incorporated Small Business Owners
For those that are incorporated there are some slight differences in terms of tax preparation. American small corporations are required to file an 1120 US corporation income tax return on the 15th day of the third month after its year end. In order for these forms to be completed you will need to provide basic information such as:
- A copy of your Certificate of Incorporation
- Employer Identification Number
- A synopsis of the principle product/service provided
- The list of your company director names, phone numbers and addresses
- Shareholders names, Social Security Number and Federal ID Number for corporations
- Number & Class of shares owned
- Key contact person other than directors provided
You will need your bookkeeping files and any expenses you claim during the year will need to be backed up with receipts. If you would like to file your own corporate tax return, please read this article on how to prepare a corporate tax return. It is a lot easier to maintain your records as an incorporated small business as you may not be the only one liable. Staying organized throughout the year will cause less stress and cost less money to small business owners this coming tax season.By organizing your documents throughout the year you will save yourself money and aggravation come filing season. If you would like to know how to prepare for your personal income tax you can look at our personal income tax preparation article. Additionally, if you are as US Corporation doing business in Canada or planning to, have a look at this article on the tax implications of US companies expanding to Canada.