Filing Small Business Taxes for the First Time: 6 Steps
You crushed your first year in business.
But now tax time has arrived and you find yourself slightly (read: completely) overwhelmed.
Do you need to fill out a Schedule C or Form 1120? When are 1099’s due? What is the difference between federal tax and state tax?
In other words, how do you file taxes as a small business owner to stay compliant with the law, maximize your tax refund, and, on top of it all, keep your sanity?
Filing small business taxes for the first time can be confusing, but these 6 simple steps can make your first tax season as a business owner a lot smoother. Let’s dive in.
Doing Business Taxes for the First Time: A Step-by-Step
Gather Your Records
Before you do anything, it’s important to have all the information you may need to successfully do your business taxes.
So, get together all of the documents that show your income and expenses, such as invoices to clients and payments for any subscriptions, memberships, or subcontract work you may have.
Using accounting software or spreadsheets is typically much more efficient than maintaining your tax records manually. Popular tax filing software, such as TurboTax, work with multiple programs (for example, QuickBooks), so all you need to do is import your data.
To make it easier to gather your records, make sure to properly maintain them throughout the tax year. It’s never fun to have to pull an all-nighter before the filing deadline because you can’t find your invoices or account for your expenses.
Instead, promptly updating your records takes only a few moments of your time — but goes a very long way during tax season.
→ Wondering how to keep track of your receipts? Here are my favorite tips.
2. Figure Out Which Tax Return Form to Use
It’s important to file your first-year business taxes using the right IRS form.
Typically, small business owners and entrepreneurs use a sole proprietorship or an LLC (limited liability company) to run their business.
If you are a sole proprietor or the sole owner of your LLC (meaning you don’t have any partners), you need to report all your business income and expenses using a Schedule C attachment to your personal income tax return.
If you run a multi-member LLC, have elected to treat your LLC as a corporation for tax purposes, or your business is organized as a C-Corporation or an S-Corporation, you need to file a separate business tax return using a Form 1120 (C-Corp), Form 1120S (S-Corp), or Form 1065 (multi-member LLC).
Filing taxes for the first time as a small business owner can be scary at first, but once you get clear on what steps you need to take for your particular business structure, things get infinitely easier.
3. Choose Your Accounting Method
When you do your first-year small business taxes, you will need to choose which accounting method you're going to use for your business.
There are two accounting methods that you can choose from:
Cash-basis: income and expenses are only recorded when the transaction is complete. For example, if you have two invoices for $200 and only one of them has been paid, your income will be $200, not $400, until the client pays the outstanding $200 invoice.
Accrual: income and expenses are recorded as soon as they happen. In our example, if you have two invoices for $200 and only one of them has been paid, your income will still be $400, even though the outstanding $200 is not in your bank account yet.
One advantage of cash-basis accounting is that you don’t pay taxes on revenue that you haven’t received yet. However, accrual accounting is typically more accurate and allows you to track your profits or losses better.
Cash-basis method is what the majority of non-incorporated businesses use and the default accounting method when you register your business. If you want to switch to the accrual method, you need to register with Form 3115.
Wondering which accounting method is right for your business? Talking with a tax specialist can help.
4. Take Advantage of Eligible Deductions
Your first time filing business taxes may actually come with a few pleasant surprises — if you know how to claim deductions on common business expenses.
Some of the most popular business expenses that may qualify for tax deductions include:
Home office: claim portions of your home that you use exclusively for your business operations.
Commercial use of your vehicle: you can’t claim your commute between your home and your business as well as traffic tickets or parking fees received during business hours, but everything else is fair game.
Employee expenses: some of your payroll expenses may qualify for deductions.
Legal fees: ordinary, necessary, and directly related to your business legal and professional fees may qualify for deductions.
This list is not exhaustive. Consult with a tax professional to determine how to lower your estimated taxes as much as possible while staying fully compliant with IRS regulations.
5. Prepare in Advance
The most important thing to remember about tax preparation is that it doesn’t start a day or two before your taxes are due.
Keeping up with your bookkeeping and having clarity on how filing taxes as a business owner works throughout the year will make completing your tax forms a breeze.
Here’s an example of a bookkeeping practice you can do today that will help you at tax time, especially if no current bookkeeping is in place.
Step 1: Print out your bank statements.
Step 2: Use 3 different colored highlighters. I like using green for income, orange for expenses and yellow for personal expenses.
Step 3: Go through your bank statements and highlight transactions green, orange, or yellow (or whatever colors you choose).
Step 4: Grab a pen and write down what each expense category is. For example, if your bank statement says “01-12-22 Amazon $78.90” and it was you buying some office supplies, highlight it in orange (business expense) and write “office expenses” next to it.
Step 5: Once you go through your bank statements, grab a piece of paper or open a new Google Doc to figure out the total for each expense category.
Step 6: Calculate your income (green highlight) and put it above your business expenses.
Step 7: Subtract your expenses from your income to get your net revenue.
Now you have a clear picture of how much your business made over a certain period of time, how much you spent on business expenses, and how much of your revenue was left after all expenses were accounted for.
Being clear on this type of information and maintaining easy-to-access and clear records will make tax time significantly easier — especially as a first time business owner.
6. Get Help from a Tax Professional
As a small business owner, you have to wear all kinds of different hats.
Especially at the beginning of your entrepreneurial career, you are probably in charge of running all operations, replacing an entire marketing department, and providing excellent customer service — all on top of being the CEO.
Filing your small business taxes is an enormous responsibility that can have significant legal consequences for your business if done incorrectly.
Plus, it takes a significant amount of your time, a limited resource that you already don’t have enough of.
This is why it’s so important to outsource your tax preparation and bookkeeping to someone who can help you navigate your numbers with confidence and ease.
(So you can spend your time on things that you truly love doing instead of spending hours Googling “small business taxes for beginners”).
Desi Tax offers comprehensive tax and bookkeeping packages for entrepreneurs and small businesses — whether you’re a sole proprietor, an LLC, or a corporation. Learn more about our services here!
