The Best Business Tax Checklist
Preparing for tax season can be daunting, even if you have kept up with your bookkeeping and record-keeping throughout the year. But it doesn’t have to be hard if you follow our ultimate small business tax preparation checklist.
To start with you need to know which tax forms you’ll need to fill out.
You can’t file your taxes correctly without the right form or forms, so identifying the proper tax documents you’ll need is one of the first steps that any small business owner should take.
The type of form you require will depend on the nature of the business you run.
- If you’re a sole proprietor, attach a Schedule C Form to your personal income tax return
I am focusing on sole proprietors and LLC business owners for this article.
Next, you need to gather your financial records.
If you use an accounting software system you will have all your financial record keeping there but if you’ve procrastinated, you will need to gather all your:
Business bank statements
Business credit card statements
You will also want to capture all expenses you have paid for out of pocket
Do you purchase things for your business using your personal Amazon account? Have you ever used your PayPal account to subscribe to a business service? As much as possible, you should always separate personal from business finances, but even if you do use a personal account for business expenses, those expenses are legitimate tax deductions.
There is also the opposite problem – excluding all personal expenses paid for from your business accounts
Just as you may purchase things for your business using your personal accounts, you might occasionally grab your business credit card instead of your personal credit card when you are in a rush. These personal expenses should not be deducted as business expenses.
Ideally, you would repay your business for these expenses but if you did not exclude them from your taxes.
Now we can get to the details in our business checklist. The best checklist I have found is simply going to the source – the IRS.
Remember when I said if you are a sole proprietor or LLC the tax form that needs to be filled out is a Schedule C? Well, that is what I recommend you use as your tax checklist. Why look elsewhere when it is all right there? It is only two pages. You can download a copy on the IRS website. In fact, I recommend that to all my clients the first time we meet. It is a very handy document to always have readily available.
So, grab a Schedule C and let’s dive in.
There is no minimum income to file the Schedule C. All income and expenses must be reported on the Schedule C, regardless of how little you earned.
Part 1 Income
The IRS wants to know how much income your small business has brought in. This number is your total sales. You can find it on your bank statements – deposits – if you used Vagaro, Clover, PayPal, Venmo – all these numbers can be found and double checked.
Cost of Goods Sold
Some categories may not apply each tax season, so you should only include what applies for the year. If you produce, purchase, or sell merchandise in your trade or business, you’ll need to take your inventory into account at the beginning and end of the year.
- Materials and supplies purchased to create your product. For example, if you are a chef this is all your ingredients. If you are a makeup artist this is all your makeup products.
Part II is where you report your business expenses. There are over a dozen categories to help you stay organized,
Line 8 Advertising:
- Website – website hosting fees, plug ins, stock photos, themes
- Personalized Merchandise
- App fees – creative apps, stat apps
- Online Advertising
- Creative & editing software
Line 9 Car & Truck Expenses
- Track mileage or actuals – (mileage usually best option) 57.5 cents per mile in 2020 – changes every year
If you use your personal vehicle for business, deducting the standard mileage rate on your tax return is usually more beneficial than deducting your actual vehicle expenses for the year. The trick, of course, is you have to track your mileage in order to take the correct deduction. Fortunately, the days of keeping a paper log are behind us, and there are a number of mileage tracking apps you can install on your smartphone to make tracking mileage painless. I use the mileage tracker that is included with QBO subscription.
Avoid the temptation to “estimate” your mileage deduction—the IRS requires you to keep a log, and failure to do so can lead to your deduction being disallowed in the event you are ever audited.
Line 10: Commissions paid to salespeople
Line 11: Contract Labor
Line 14: Employee Benefit Programs:
Line 15: Insurance – general liability (not health). Health Insurance Premiums are entered on your individual form 1040
Because you are self-employed, in all likelihood, you buy your own medical insurance. If this is the case, you can deduct 100% of what it costs you to cover yourself and your family.
In this time of rising healthcare costs, this is a significant deduction.
Line 16: Interest – for business credit cards or loans
Line 17: Legal & Professional Services – fees paid to lawyers, accountants and consultants
Line 18: Office Expenses:
- Equipment: – computer, printer, scanner, phone & accessories
- Office furniture – less than $2500
- Supplies – stationary
Line 20: Rent or Lease of space or equipment
21: Repairs & Maintenance – You can deduct any work you have done to repair business facilities, equipment and company vehicles. You can also deduct improvements and expansion projects.
22: Supplies (not in COGS)
23: Taxes & Licenses
This also includes licensing fees. The Internal Revenue Service considers taxes part of the cost of doing business, and it comes off your taxable income. If you have company vehicles, license plates are deductible.
24: Travel & Meals
Make sure your meal expenses are properly categorized
Generally speaking, expenses for meals you have with your customers and clients are only 50% deductible. However, certain meals—such as those purchased while you are traveling—might be 100% deductible. Additionally, meals you provide for your employees for the business’ convenience—let’s say, pizza you order so your team can work through lunch to meet a deadline—are also 100% deductible.
If you classify all meals as “Meals and Entertainment” expenses, your tax preparer will only deduct 50% of the expenses as a business expense. Take a little extra time to subcategorize these expenses as Travel or Employee meal expenses to maximize your tax deduction
- Overnight travel – can deduct hotel, airfare, car, taxi, meals
- Big change in 2021 – 100%
- Keep detailed receipts not total receipt for audit
- Cell phone
26: Wages – employee payroll
27: Other Expenses:
- Prizes for Giveaways
Continuing Industry Education – The cost of training classes, webinars, books, magazine subscriptions, other research material, educational fees, travel and other expenses related to business education and training are fully deductible.
- Bank or Merchant Fees
Line 30: Home Office: only about 33% of all self-employed individuals claim it. Usually, they avoid using this nice deduction because there are a lot of catches to it, and therefore they think using it can trigger an audit. But in reality, the IRS applies a simple two-part test:
- One, the dedicated space in your home must be used as your principal place of business, or it must have some other acceptable business purpose, and
- Two, it must be used regularly and exclusively for the business.
If you meet these two criteria, then the applicable percentage of homeowners insurance, utility bills and so on can be deducted. Should you decide to claim this deduction, you will have to decide on which method you’ll use to claim it.
The IRS offers 2 options for calculating your home office deduction. a flat-rate deduction of $5 per square foot for up to 300 square feet of home office space. But if a big percentage of your home’s square footage is dedicated to your home office and your home expenses (utilities, etc.) are high enough, and you’re able to keep and compare detailed records, you might get a bigger deduction with the “regular” method.
For example, if you use a 10 foot by 12 foot room for your business, that’s 120 square feet. If your home is 1,200 square feet, 120 square feet is 10 percent that you can claim as business expense.
You may need to fill out more than one Schedule C. It’s one Schedule C per side gig. So if you have two side gigs, you’ll need to fill out two Schedule Cs.