Knowledge is protection when the IRS is involved. I'm Darrin Mish, a tax attorney in Tampa with 32 years of experience representing taxpayers nationwide. Here's what I want you to understand.
If you are starting out in business, you need to be aware of the tax obligations you have as a first-time business owner. If you are new to entrepreneurship, this post will help you navigate your tax responsibilities to Uncle Sam. But your due dates to file your tax returns and other forms of obligations depend on what type of business you run. It also depends on whether you choose to operate according to calendar year or financial year.
One common type of business especially to those starting out is a sole proprietorship. As a sole proprietor, your obligation is to file Schedule C (Profit or Loss from Business) and Schedule SE (Self-employment Tax) along with your 1040 (US Individual Tax Return form). Your deadline would depend on whether your business runs on calendar year or financial year. If you run your business following calendar year, then your deadline to file your forms is April 15 just like wage-earners. On the other hand, if your business follows a financial year, you are given till the 15th of the fourth month after the end of your financial year.
If you anticipate owing more than $1,000 in net taxes (less withholding and credits) and your withholding is less than the smaller of 90% of the tax to be shown on your current year tax return or 100% of your previous year’s tax liability, then you should make payments of your estimated taxes.
The next common type of business for individuals is a partnership. Business partners must file Form 1065 (US Return of Partnership Income) to show how much profit or loss your business has made for the year. In addition, you also must file Schedule K-1 (Partner’s Share of Income, Credit and Deductions) and give a copy to the partners. These forms are also applicable for Limited Liability Companies (LLC’s). The deadline to file is the same as for sole proprietors.
If you run a corporation, you have to file Form 1120 (US Corporation Income Tax return). This should have already been done by March 15th if you follow the calendar year. If your business is run following a fiscal year, your deadline is the 15th day of the third month from the end of your fiscal year. On the other hand, if your business is an S-Corporation, you are obligated to file Form 1120S (US Income Tax Return for an S-corporation). You must also file Schedule K-1 and submit a copy to your shareholders.
As a business owner, you would be interested to know the types of deductions you can make to lower your taxes. Generally the IRS allows deductions that are considered business expenses. More specifically, these expenses are:
1. Normal business expenses
This includes advertising, wages, rental, membership fees to professional organizations, utilities and the like.
2. Purchase of equipment
You are allowed to deduct a limited amount of the cost of new business equipment in a year rather than depreciating the cost over several years. The maximum deduction allowed is $25,000.
3. Meals and entertainment costs
The cost of meals and entertainment may be deducted from your taxable income provided it is not exorbitant but the ceiling is 50% of the cost of qualifying meals and entertainment. To qualify, you must show there was more than a general possibility of gaining some business benefit other than goodwill, that you conducted business during the entertainment, and conducting business was your main purpose.
4. Travel
You can claim travelling and travel-related expenses like meals, laundry, telephone calls, fax charges and lodging.
In order to successfully claim these deductions, you have to keep accurate records of all expenses such as receipts, statements of accounts, bills etc. Keep track of every detail including the business reason for your expenses, exact amounts spent, dates, location, type of entertainment, and the name, title, and occupation of the people you entertained.