Small Business Brief


Filing Small Business Taxes for the First Time? Why You May Need to File Personal and Business Taxes Separately

Groundbreaking innovation aside, running a small business is all about compliance. You’ll spend a good chunk of your time in the first year making sure you’re operating above the fray.

But don’t fret. Filing small business taxes for the first time or submitting your quarterly payroll doesn’t have to be intimidating.

These necessary evils help keep your financial documents in order so you avoid hefty fines. Tax returns are the key to proving your income for future financing.

Take a look at this guide to filing small business taxes for the first time.

Ducks, I need You in a Row

The first order of business when filing small business taxes for the first time is getting organized. In a perfect world, all your records are pristine leaving only the need to calculate small sums and transfer the information onto a return.

But in your first year of business, this is nothing short of a dream. Expect to go through your business budget and first reconcile all your expenses and income.

It’s not a bad idea to hire a part-time bookkeeper to help you input all your receipts into taxable categories. Your spreadsheets might not match the labeling system of the IRS. 

Getting these ducks in a row will make the filing process a breeze. 

Learn Your Deadlines

As a small business, you need to file both state and federal taxes. These deadlines aren’t necessarily the same.

If you’re charging sales tax, there are other filings you need to do at the local level. But for preparation’s sake, focus on national and state deadlines so you can work backward with a planning timeline.

These are the deadlines you want to avoid missing because they can cause a paperwork backlog. The longer you wait, the more you risk having to file additional information and explanations to the IRS.

If you’re estimated to owe money, this can also mean penalties if you estimate your taxable obligation incorrectly.

What About Your Accounting Basis?

You’ll need to decide whether you’re going to use a cash or accrual basis. These affect how you present information on your return.

Using the cash basis, the income you receive gets counted when its paid. But with the accrual basis, your business income is recognized when the expense is incurred.

These sound the same but they represent two different ideas in accounting. For example, you can count an invoice using accrual-based accounting even if the client doesn’t pay you for 30 days. 

But you wouldn’t count this invoice using cash accounting system until the money actually hits your business account. Accrual systems require a little more tracking so you know what you’re looking at in reality vs projected.

If you don’t have an accounts receivables team in place, the accrual basis can easily get confusing. It assumes you’ll definitely track down every dollar outstanding when this isn’t always possible. 

Opt for the cash basis until you’re familiar with the accrual system. The only exception is if you’re working with a full time accountant who can do the tracking for you. 

Financial statements are almost always done on an accrual basis. When and if you do switch accounting systems later, you need to stick to the new method. 

People choose the accrual method during their first year in business when they’re struggling to collect income, too. This helps them prove the profitability of their business to potential investors.

If you don’t want to end the year with your income at zero, the accrual basis is a great way to level things out. The same goes for unpaid expenses that you’ve financed.

These unpaid expenses can be counted in full for your first tax year even if you don’t pay then until the following year. This increases the number of your deductions so you pay fewer taxes.  

The IRS doesn’t fancy businesses changing from one system to the other because it makes your expenses and income harder to track. 

Depreciate vs Deduct

As a new business, you’re getting all of your equipment for the first time. You have the option to depreciate these items over time or take the deduction in the current tax year. 

The decision is based on a number of factors like whether you’ll be replacing your equipment year after year or is year one the primary year you need to new items. This is important to note because you won’t want to take the entire deduction if you have nothing to offset your taxes in years to come. 

In some cases, depreciation even saves you money. The asset might have more financial perks as a depreciation than as an outright deduction. 

Still, if you have a booming first year in business, you’ll get the biggest tax break by taking the full deduction since you can offset your taxable income this way. 

If you have no income during your first year, there’s no need to take a full deduction. But you won’t be able to depreciate either. 

Instead, you can hold on to the depreciation option until you have a profitable year. Use an income tax calculator to estimate your taxes in future years. 

Filing Small Business Taxes for the First Time

Don’t be intimidated by the process of filing small business taxes for the first time. There’s a lot of paperwork to track down, but once everything is within your grasp it’s simply plug-and-play.

Use the IRS website as a guide on what deduction limits exist for that year. Using tax software is also a viable way to file since formulas on deductions and depreciation are calculated automatically. 

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