8 Essential Steps to Prepare Your 2023 Small Business Taxes
Planning for your small business taxes in the summer? That’s right—it’s never too early to start preparing for the upcoming tax season, which will be here before you know it!
Proper planning is crucial to avoid being caught off-guard and to prevent potential financial and legal pitfalls. By taking proactive steps and understanding common tax mistakes, you can reduce tax liability, identify eligible deductions, and stay compliant with the latest tax laws.
Follow our top tips to get your business ready for the 2023 tax season and avoid unnecessary stress.
Common Tax Mistakes Small Business Owners Make
Before diving into the best practices, let's address common mistakes we see entrepreneurs make on their small business taxes:
Procrastination: Delaying tax preparation can lead to errors, missed deductions, and penalties. Start early to stay ahead.
Inadequate finance tracking and organization: Poor recordkeeping can result in missing deductible expenses and facing audits. Prioritize your financial recordkeeping!
Mismanagement of payroll taxes: Mishandling payroll taxes can lead to severe penalties and legal consequences. Ensure timely and accurate payroll tax processing.
Co-mingling personal and business transactions: Mixing personal and business finances can create tax confusion. Establish a clear system for owner's draws and contributions, if applicable.
Lack of knowledge of the latest tax laws: Ignorance of tax law changes may result in missed opportunities for deductions and credits. Stay informed to optimize your tax benefits.
Now, let's explore the actionable steps to prepare for the 2023 business tax season in greater detail.
1. Understand Which Business Tax Form You Need to File
First, you should know which tax form you need. These forms vary as different business structures have distinct tax requirements. Here’s a quick breakdown:
Sole proprietors & Single-member LLCs: Schedule C with their individual tax returns
Partnerships & Multi-member LLCs: Form 1065 & Schedule K-1
Corporations & LLCs Taxed as Corporations: Form 1120
S Corporations: Form 1120-S
When you work with a tax preparer, they will advise you on which form you need and file your small business taxes for you, ensuring compliance and accurate reporting.
2. Know Your Tax Deadlines
Mark all relevant tax deadlines on your calendar and set reminders. Missing deadlines can result in late-filing penalties. Note the deadlines for income tax filings, estimated tax payments, and state or local tax obligations.
Quarterly Taxes: Most businesses must file or pay quarterly estimated taxes on April 15, June 15, September 15, and January 15. Taxes are due the next business day if the due date falls on a weekend or holiday.
Payroll Taxes: Companies with employees must also file federal, state, and local payroll taxes regularly.
Sales Taxes: Businesses that sell goods or provide services in certain states must establish an account with the state and file returns to show their sales and purchases. Every state has different filing rules and deadlines.
3. Maintain Thorough & Organized Financial Records
Finance tracking and organization are vital to accurate small business tax filings and overall financial management. Be sure to:
Use accounting software (or a spreadsheet): If possible, utilize accounting software to track income and expenses efficiently. At the very least, use a clean spreadsheet. Categorize transactions for easy reporting—this will save you a LOT of time and hassle on tax day!
Organize receipts: Keep physical and digital copies of receipts for all business expenses. Separate your personal and business expenses to avoid confusion.
Maintain accurate records: Regularly update financial statements, such as balance sheets and profit and loss statements. These records offer insights into your business's financial health.
Track cost of goods sold (COGS): If your business sells products, diligently record the costs of producing or purchasing those goods.
Implement a filing system: Organize financial and business documents, invoices, and receipts in a structured filing system, making retrieval and reporting easier.
Additional documents to gather include:
Business formation documents
Payroll records
W-2s
Health insurance information
Retirement account information
Bank and credit card statements
Estimated tax payments records
Your previous year’s business tax return
Remember, top-notch financial records are vital if your business is selected for a tax audit.
4. Separate Your Personal & Business Finances
On the note of organization, one of the most important things you can do as a small business owner is to keep your personal and business finances separate! This essential step ensures:
Legal protection: If you are involved in a legal dispute or lawsuit, mixed finances could allow the court to “pierce the corporate veil” and hold you personally liable for business debts and liabilities.
Accounting and financial clarity: Separation creates a clear picture of your business’s performance so you can make informed decisions and set realistic financial goals.
Easier tax reporting: You’ll be less likely to miss deductible expenses or attract unwanted attention from tax authorities due to unclear financial records.
Building business credit: By maintaining a solid business credit profile, you can secure better financing terms, access larger credit lines, and foster credibility with suppliers and partners.
Professionalism and credibility: Potential clients, investors, and lenders will see that you adhere to sound financial practices, take your business seriously, and be more inclined to do business with you.
Tax law compliance: Since personal expenses are generally not tax-deductible, mixing personal and business transactions can lead to claiming ineligible deductions and raise red flags during tax audits.
5. Carefully Manage Payroll and Owner's Draws
If your business has employees, you must file and pay payroll taxes throughout the year. This is usually quarterly but could be more often, depending on your business. You could face significant fines if you don’t file and pay payroll taxes as required. Stay current with payroll tax requirements, including federal and state income tax withholding, Social Security, Medicare, and unemployment taxes. Use reputable payroll software to automate calculations and filings.
Do you take owner's draws? Even as a sole proprietor or single-member LLC, you should be strategic and account for these closely. There is no legal limit on the amount or frequency of owner’s draws. However, you need to ensure you:
Have enough cash in the business
Consult with your business partner if you have one
Report it on your personal tax return
Your tax liability for an owner’s draw depends on the amount, business structure, and state tax laws. It is typically recognized as income and may be subject to federal, state, local, and self-employment taxes.
6. Understand the Latest Tax Laws
Tax laws change, and staying informed is crucial for maximizing deductions and credits. Invest time researching and consulting with a tax professional to understand recent tax law updates that may impact your business.
Many temporary tax laws and programs offered during the COVID-19 pandemic are ending. One example is the net operating rule, which mandates that if your deductions exceed your gross income, you can carry the loss forward to offset up to 80% of your taxable income in future years. This limit didn’t apply to net operating losses occurring in 2018, 2019, or 2020. However, any net income loss generated after 2020 is once again subject to the 80% taxable income limit.
On the other hand, let’s look at some good news:
Employers can enjoy increased credit for their employee pension contributions for the first five employer tax years, starting in 2023.
Pass-through entities may qualify for a 20% deduction based on their income.
C corporations enjoy a nice tax break since the Tax Cuts and Jobs Act dropped the corporate tax rate from 35% to 21%.
7. Know Which Deductions and Credits You Qualify For
A tax deduction reduces your taxable income, while a tax credit is a dollar-for-dollar reduction in the amount of tax you owe.
As you prepare your small business taxes, familiarize yourself with common business deductions, such as business-related expenses, the home office deduction, and retirement plan contributions. Keep detailed records to substantiate deductions.
Next, research tax credits applicable to your business, such as the Research and Development (R&D) Tax Credit or the Work Opportunity Tax Credit (WOTC). Numerous business tax credits and deductions are available, so determine your company’s eligibility and gather the necessary documentation to claim those that apply! Your tax preparer can also guide you on all possible options to help mitigate your tax liability.
8. Determine if You Should Request a Filing Extension
Do you need more time to meet the small business tax filing deadline? You may need assistance with a tax matter or may have received some documentation late. Consider requesting an extension. This typically gives you until October 15 to file.
However, remember that an extension only extends the filing deadline, not the payment deadline. Estimate your tax liability and make required payments to avoid penalties and interest.
Preparation: The Key to a Successful 2023 Business Tax Season
You can ensure a smooth and stress-free tax season by avoiding common tax mistakes, understanding the right steps to take, and staying informed about the latest tax laws. Remember to file the appropriate tax form, diligently track and organize your finances, and take advantage of eligible deductions and credits.
With proper planning and execution, you can confidently navigate tax season and concentrate on what truly matters: growing your business!
If you’ve been managing your taxes independently but are ready to take it off your plate, contact JLS Accounting. We’ll take care of the numbers and help you maximize your tax benefits and minimize your liability so you can focus on your passion. Book an intro call so we can get to know each other today!