To everything there is a season and I call mine tax season. Soon we at H&R Block will be in tax season and there are a few ideas I would like to share with you. Taxpayers come in all shapes and sizes but the ultimate goal is the same, Ie. to pay the least amount of tax we are required to legally pay. Some of our clients are what I call proactive, they have all their ducks in a row with a set of books either prepared by a professional or they prepare the books on their own. They keep their personal transactions separate from their business transactions and preparation for tax time is relatively easy. Some of our clients keep their receipts and organize them at tax time. Regardless of which approach you take there are some common items you will need to address.
The basic idea is every financial transaction that relates to your business needs to be accounted for and summarized. All personal transactions must be in a separate analysis. Your business transactions will be reported on Schedule C if a sole proprietor or single member LLC, a Form 1065 if a partnership or an 1120S if you choose to do business as a Subchapter S Corporation. As your business matures you should have your Tax Preparer do a Business Structure Analysis to determine which of these alternatives are best for your situation.
If your business has employees, you should be filing quarterly payroll taxes on Forms 941 and 940. Form 941 summarizes the taxes withheld from employee wages and the employer’s matching portion as well. A payroll system is advised inasmuch as these are trust taxes meaning that IRS is trusting you to remit the employee’s taxes. You do not want to upset the IRS. These completed forms should be part of the package of information that you send to your tax preparer at year end.
If your business purchased real estate or equipment with an estimated life extending beyond one year your Tax Professional will need to record depreciation taking this expense over a number of years as defined by the classification of the asset. Land is not depreciated but the building sitting on the land is, so there will be an allocation of the purchase price between land and building. If real estate or equipment is financed there has to be a separation of principal and interest on your payments. Interest is deductible but principal payments are not.
Inventory should be any items for resale, not the items you use in providing your service. The total cost of Inventory on hand on December 31st , if this is you, year-end should be calculated and provided to your tax preparer.
Other line items on your business tax return will include utilities, supplies, repairs and maintenance, other taxes and licenses, advertising, office expense, rent, professional and legal expense, travel, business auto expense (separated from personal use), contract labor, insurance. There may be other expenses that you incur based on the type of business you have. Your tax professional will need the total spent for these items and can give you more clarity around acceptable expenses.
H&R Block provides a wide range of services to include bookkeeping, payroll, quarterly taxes that can be performed by a professional or we have systems for the do-it-yourself taxpayer. We team with Block Advisors and Wave Accounting software to find the right solution for your needs. Contact your local H&R Block Certified Small Business Advisor prior to year-end for best results.
Lewis Baumgarner, CPA
Master Tax Advisor
Block Advisors Small Business Certified