Small Business Tax Preparation Checklist & Helpful Tips
Small Business Tax Preparation Checklist & Helpful Tips
The New Year brings relief from the hectic holiday season and thoughts of a fresh start. As a small business owner, you’re likely focusing on the year ahead, and the last thing you want to dwell on is last year’s paperwork. However, gathering the necessary information for your accountant to prepare your tax return will help things go more smoothly. The following checklist is a great way to get a head start on your small business tax prep and make sure you don’t miss out on some of the most valuable deductions!
Income Statement & Balance Sheet
Let’s start with the basics. If you don’t have these (or similar statements) already prepared, you need a bookkeeper, and you need one yesterday.
The balance sheet contains an asset list, which is necessary for the computation of tax depreciation and other reportable liability and equity account items. The income statement summarizes all your sales and expense activity for the tax year.
Both statements summarize the activity in your bank and credit card accounts as well. But more importantly, these statements should be prepared more often than annually to provide you useful feedback regarding your business operations.
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Payroll Summary & Form W3
The payroll summary contains expense items that are often overlooked, such as federal and state employment taxes, direct deposit fees, and payroll provider fees.
Loan Interest
When you finance any business asset, the interest you incur is a business expense. Bear in mind that part of your monthly payment is interest. Make sure it’s available to your accountant if it’s not already included on your income statement.
Closing Statements
Whenever you purchase or sell real property, such as an apartment, land, or your office building, you will receive a summary of the closing costs along with the purchase or sale price of the property. Many (but not all) of those closing costs will be deductible in the current year, while other costs will either be deductible over several years or partially deductible.
Insurance Details
It’s best practice to list all insurance expense types on the income statement, considering not all insurance expenses are treated the same when it comes to filing. Business liability, property, worker’s comp, life, health, malpractice, error & omissions are the most common.
Important to note: Insurance expenses benefiting company officers should be stated separately.
New Section 199A Business Deduction—up to 20% of business profits!
The Tax Cuts and Jobs Act of 2017 (TCJA) creates the new Section 199A deduction for any business entity other than a C corporation. Much confusion still exists surrounding the applicability of this law and technical corrections and IRS guidance are forthcoming. However, this deduction is a game-changer!
Be prepared to have a serious conversation with your accountant along the following lines:
- Employees are not eligible for this deduction; however, independent contractors are eligible. If you are an employee receiving little to no employee benefits, you may want to investigate if it’s feasible to switch your employment status.
- The deduction is included on the personal (not business) tax return. With few exceptions, the deduction will be 20% of your business profits and that amount will be subtracted from your taxable income, provided the taxable income on your tax return is less than $315,000 if you are a “married-filing-joint return” filer ($157,500 for all others).
- Passing this income threshold may reduce this deduction depending on many factors, such as the cost of your employees, your taxable income, and whether or not your business falls under the category of a “specified service business.”
- Unknown to many practitioners at this point, many rental real estate activities such as renting out single family homes and apartments will meet the standard of “qualified business income” and thus qualify the owners for this deduction.
Now is the time to investigate if it is advantageous to change your business entity. The same business would produce a different deduction depending on whether it’s organized as a sole proprietorship, LLC, or S-Corporation.
Home Office Deduction
Contrary to public opinion, this deduction rarely poses a red flag to IRS auditors because the deduction is common and is often small compared to revenue and other expenses. If you think you may qualify, I highly advise you have your accountant investigate!
Keep in the mind that the rules for this deduction for storage space are much more lenient. If you use part of a room or part of your garage to store equipment, supplies, or inventory then you likely qualify.
Provide your accountant with the square footage of your business space and the entire home. In certain circumstances, your accountant may need further information regarding your home expenses.
Personal Vehicle Expense Report & Mileage
Very rarely do taxpayers keep up with their mileage log, as it’s tough to get in the habit of doing so on a regular basis. If you use your vehicle substantially for business purposes, I highly recommend using MileIQ or a similar phone app. Simply toggle between “personal driving” and “business driving” on your phone and the app does the rest—at the end of the year, you can print out a report that will wow your accountant!
To make the most out of your vehicle expense deduction, provide the following annual amounts for each personal vehicle that is used for business purposes:
- Business mileage (non-commuting)
- Total mileage
- Lease payment, if applicable
- Original purchase price (with fees and taxes included)
- Interest incurred, if financed
- Gasoline
- Oil changes and maintenance
- Repairs
- Insurance
- License fees, renewals, emissions testing…
- Parking and tolls when traveling for business purposes
Overlooked opportunities:
Don’t forget to bring your prior year tax return, especially if switching accountants. In fact, it’s a good idea to gloss over your tax return as a final check, to identify documents you may have missed.
While you’re at it, make sure you haven’t overlooked these valuable small business tax deductions:
Contributions of Used Personal Equipment
If you donate personal equipment (such as a computer, furniture, etc.) to your business, you may take a depreciation deduction. Your accountant will need a description of the item, the date is was converted to business use, and the “fair market value” (i.e. what you could reasonably sell it for) on that date.
Business Purchases Paid From Personal Credit Cards
Maybe you accidentally made a purchase with the wrong card, or perhaps the vendor only accepted Visa when you company card is American Express.
Research & Development Tax Credit
If your company uses the scientific method in developing or improving products, you may be eligible for a substantial credit. Software developed for internal purposes may also be eligible. Be prepared to have a conversation with your accountant if you think you may qualify.
Charitable Contributions
You may be able to write off these payments as advertising expense if a substantial reason for the making the donation is community recognition. Realizing the deduction in this manner will also yield more tax savings.
