When I decided to start my administrative consulting business in December 2012, I was not sure what type of structure I wanted, or the differences in the liability, tax requirements, etc. I did some research online and then settled on forming a Limited Liability Corporation, Clue Consulting, LLC; which I elected to treat as a Sole Proprietorship.
I expected tax time to be an interesting experience. I am a complete novice when it comes to small business taxes, with no clue how to file, what to claim, or whether I should have an EIN. I am very much a do-it-yourself type so I went to the IRS website Small Business and Self Employed Tax Center, where I was able to find answers to all my questions.
Here are a few tips which helped me survive my first year filing small business taxes:
Understand Your Tax Structure
The first step to understanding business taxes is knowing how your business structure relates to its tax filing requirements. Because I elected to treat my LLC as a Sole Proprietorship, I am able to file form Schedule C, Profit or Loss from Business — claiming my business income and expenses on my form 1040. Knowing exactly which tax forms your business requires, prior to starting your return, is essential in ensuring its accuracy.
Choose a Reliable Preparer
For the past 12 years, I have used TaxACT to file my federal and state taxes. With this being my first time filing small business taxes, I considered using a certified professional accountant to help me navigate the murky business tax waters. However, I remembered seeing the prompts/questions for business owners in the software program so I decided to try that first. I was pleased to see that I was able to input all of my expenses, income, and any other information pertaining to my business, and file the necessary forms, without any additional expense or hassle — using a reliable program with which I was already familiar.
Keep Good Records
Although my business only existed during one month of 2012, I racked up a good amount of expenses in the form of startup costs. Every time I made a payment or ordered necessary supplies, I used the same credit card. I also kept a mileage journal to track the business mileage on my personal vehicle. This made the process a lot smoother since I had all my information on-hand, and in one place. I plan to use the same tracking system for this and all future years to ensure the process remains as stress-free as possible.
The Small Business Administration is also a great resource for information on business structure and tax requirements. The most important thing to know before starting your business tax return is to be smart and do your research. Read the free information the IRS provides on its website, seek advice from a tax professional, or hire a certified professional accountant. Know what deductions are appropriate for your business, and keep your records organized, to ensure you have all your ducks in a row and avoid potential headaches down the road.