The tax filing deadline is quickly approaching. Due to the pandemic, most businesses have until May 17 to file their returns this year.
In a perfect world, you’d be thinking about tax prep year-round, keeping records organized to help ease your burden, mentally and financially, come tax time.
But 2020 wasn’t a perfect year.
Whether the pandemic forced you to rethink your business model, start a new business or borrow from the Paycheck Protection Program, here are some tips for filing this year.
TAX PREP BASICS
1. KNOW YOUR DEADLINES
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Other tax deadlines include estimated tax payments, which are due quarterly, and payroll taxes, which are deposited monthly or semiweekly.
2. GATHER YOUR FINANCIAL RECORDS
Pull together your financial records before starting your taxes. That includes payroll documents, income statements, depreciation schedules, bank and credit card statements, and receipts for large purchases . You’ll need this information to complete your business tax returns.
3. COMPLETE THE PROPER TAX FORMS
Prepare the proper tax forms to report any business income or loss, legitimate deductions and estimated taxes. These forms will be filed along with or in addition to your personal 1040. Common tax forms include:
— Schedule C: Report profit and loss (sole proprietor) .
— Form 1120 or 1120S: Report income, gains, losses, deductions and credits (corporations).
— Schedule K-1: Report business expenses, income and losses (partnerships). Typically filed along with Form 1065.
You may also need to file specific forms for depreciation , home-based businesses , self-employment taxes and estimated taxes .
4. LEAN ON A TAX PROFESSIONAL
If your business model is straightforward and your records are organized, you may not need the help of a tax professional.
But if you’re just starting out or your business has changed, they can help you identify deductions, determine the best structure for your business and head off future tax headaches.
Most importantly, they can make sure you don’t pay too much or too little.
“One of the primary benefits of small-business ownership is to strategically claim write-offs to reduce your potential tax exposure,” says Joseph Gutierrez, a certified public accountant with the Tax Group Center . “This can require a sophisticated understanding of the tax code and the percentages and type of deductions other businesses of similar stature claim.”
ADDITIONAL CONSIDERATIONS
DID YOU START FREELANCING?
If you started a side hustle or turned to freelancing full time, “every dollar you earn is taxable,” says Lawron DeLisser, a CPA and business coach . “Yes, even if you make less than $600.”
That’s because the IRS considers you a small business. And small-business owners need to pay income taxes and self-employment taxes. (When you work a W-2 job, your employer automatically withholds these taxes.)
Plan on paying around 30% of any income earned after you’ve deducted any applicable business expenses. The IRS requires you to estimate these taxes and pay them quarterly. You’ll be hit with interest and penalties if you don’t.
DID YOU RECEIVE A LOAN THROUGH THE
The IRS rules regarding PPP loans were a bit fuzzy, but came into focus late last year. The more important things to know are:
— Forgiven PPP loans do not count as taxable income.
— Business expenses paid with a PPP loan are deductible, even if the loan is forgiven.
These rules apply to federal taxes, but some states deviate from the tax code on this issue.
Florida, for example, considers forgiven PPP loans taxable income for state taxes. And California does not allow businesses to deduct expenses paid with forgiven PPP loans on their state taxes .
DID YOU WORK IN MULTIPLE STATES?
Hopping state lines has tax implications. Namely, you need to file a return in the state you live in and any states you worked in.
That doesn’t mean you’ll pay taxes two or three times on the same income. Most states have a system to reconcile multiple state returns, via reciprocity or tax credits, but the exact process varies.
Digital nomads who bounced from state to state to state last year may also need to file multiple returns depending on where they lived and for how long.
“Each state has its own qualifications for filing but as a rule of thumb, there are three key factors: sales, property and payroll,” says Scott Hoppe, a CPA and founder of Why Blu, an accounting firm in San Francisco . “State taxes depend on where the services are performed or goods are sold, where the business property is located and where the employees of the business reside.”
A tax professional can help you determine if you need to file in multiple states based on those data points.
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This article was provided to The Associated Press by the personal finance
RELATED LINK:
NerdWallet: Breaking down the tax implications of PPP loans http://bit.ly/nerdwallet-tax-implications
Kelsey Sheehy Of Nerdwallet, The Associated Press
