It’s not easy being a small business owner this time of year. Stress levels are on the rise as owners scramble for receipts and hope they’re not leaving money on the table or opening themselves up to an audit.
The tax filing deadline is right around the corner. April 15 is the date for sole proprietorships, partnerships and limited liability companies, while March 17 was the deadline for corporations that report on a calendar year.
Small business owners need to make sure they’ve properly filed each form, correctly itemized each deduction and write-off, and have their receipts handy in case of a dreaded audit. Whether this is your first year filing or your tenth, here are a few tips to help you eliminate errors and navigate this year’s business tax season:
1. Know your forms
The first step is determining the correct tax form to use. In essence, every business needs to report its business earnings to the IRS and pay taxes, but the exact forms you’ll use depend on your business structure.
Partnerships report their income/losses/expenses on Form 1065. If you are a sole proprietor, then you report your business income and expenses on a Schedule C attached to your personal income tax return. Likewise, if your business is an LLC treated as a sole prop, you also use the Schedule C attachment. But if you have a corporation or have elected to treat your LLC as a corporation, then you will need to prepare a separate corporate tax return with Form 1120. UseForm 1120S is if you have elected S Corporation Status.
The IRS provides helpful tables that break down the necessary tax forms for each business type.
2. Home office deduction
Many small business owners are intimidated from taking the home office deduction, because they’ve been told it’s a red flag for an IRS audit. However, if you are legitimately entitled to the deduction, you should take it, as it can add up to thousands of dollars in deductions. In order to qualify for the deduction, you need to have a dedicated space in the home that you use solely for the business and nothing else (and proof of that fact).
Starting with the 2013 return, you now have the option to use a simplified method for calculating the home office deduction. In the past, you needed to add up your actual costs (mortgage/rent, utilities, etc.) and multiply that figure by the percentage of your home that’s dedicated to your office (see Form 8829). Now, you can choose to take a deduction of $5 per square foot of office space—with a $1,500 deduction cap.
While the simplified deduction will save you time and paperwork, it may give you a smaller deduction. Savvy tax filers should calculate the home office deduction using both methods and see which is more advantageous. Of course, if you haven’t kept track of your home expenses and don’t have documentation to back it up, then you should take the simplified deduction.
Source: Mashable | SAGE