Tax season is here, and whether it's your first year in business or your tenth year, it always feels like there’s an endless list of tasks to get through to file your return. If you live in the US, this step-by-step guide will help you get organized so you can get a jump start and file your 2016 tax return well before it’s due.
Let's get started.
Step 1: Remember These Tax Deadlines
Tax deadlines can sneak up on you. Missing them can result in expensive penalties.
Your taxes are due on April 17, 2017. Depending on the nature of your business, you may also need to submit additional documents to the IRS before that date.
Add these dates into your calendar and don’t miss a single deadline:
February 2: Forms 1099 and W2 Postmarked
If you paid an independent contractor or employee more than $600 in 2016, you should have already provided them with a 1099 or W2, respectively, on or before February 1.
March 16: Partnership Returns Due
March 15 is the deadline to file individual and partnership tax returns. The earlier deadline gives partners a chance to receive Schedule K-1's before the personal tax return due date.
April 17: Corporate Tax Returns Due
March 15 is the deadline to file your corporate tax return (forms 1120 and 1120S), or apply for a tax extension.
April 17: Individual Returns Due
April 17 is the deadline to file individual or sole proprietor tax returns (forms 1040), or apply for a tax extension.
Step 2: Get Your Receipts In Order
If you haven’t done so already, it’s time to go paperless. Storing your receipts online will save you from a mountain of paper to sort through come tax time.
These tools will help you organize your receipts the paperless way:
You can upload and access scans or photographs of receipts, business cards, and important documents from any device. Use the ScanSnap Evernote Edition Scanner to upload documents straight into your Evernote account.
ShoeBoxed (up to $100/month)
If you have a huge backlog of receipts to store, you can opt to mail them off in one of Shoeboxed’s ‘Magic Envelopes’, and Shoeboxed will enter all of the data for you.
Expensify (starts at $5/month for each active user)
Payments made with connected bank cards are automatically imported, and cash expenses are added manually. Expensify’s mobile app also lets you photograph and store receipts on the go. Receipts are automatically matched with the correct expense using the service’s SmartScan technology.
Step 3: Get Your Bookkeeping up to Date
To file your taxes, you need to ensure your books are up-to-date. A clear set of books gives an accurate view of your business’s income and expenses. They’re also your first line of defense in case of an audit.
You can use online accounting software to process your own bookkeeping. Alternatively, if you’d prefer to have a professional do it for you, look into hiring a bookkeeper either locally or online.
If the information in your books is incorrect, you run the risk of unintentionally making a false claim to the IRS.
When it comes to getting your books up-to-date, choose a method that’s best for you based on the amount of time you have to dedicate to bookkeeping, your budget, and how confident you feel about managing your own books.
Step 4: Submit 1099s
If you paid an independent contractor more than $600 during the tax year, you should have already sent a Form 1099 to the contractor by February 1 and you'll need to submit a copy to the IRS by March 31, 2017.
Step 5: Understand Sales Tax Requirements
Sales tax laws are complex at the best of times. You’ll want to consult your accountant on this, but let’s briefly look at how sales tax applies to online businesses.
State tax requirements are dictated by a legal concept called ‘nexus’. Nexus means that a business needs to have some physical connection to a state in order to collect sales tax there. If your business develops nexus in a state, you must collect sales tax in that state.
While many businesses will only have nexus with the state they live in, there are instances where your business could develop nexus in additional states.
Here are some examples of things that develop nexus:
- An office
- A warehouse
- Hosting a pop-up shop or selling at a craft fair
- Storing inventory
You are legally required to collect sales tax in any location where your business has developed nexus. Tax laws vary between states, so before you file your return, consult with a tax professional to confirm that you’re adequately meeting state sales tax requirements.
Step 6: Consider Filing for a Tax Extension
It’s important to understand that a tax extension does not get you out of paying taxes owed by the regular deadline.
So why bother filing for an extension in the first place? Well, filing for an extension is easy and it gives you more time to file your tax return.
To file for a tax extension, you’ll need to fill out the tax extension form that corresponds with your business type (below) and estimate the amount of taxes you owe for the year. Then, submit the completed form and your payment for taxes owed to the IRS electronically or via mail on or before April 15 (March 16 for corporations).
As long as you file before deadline, the extension is automatic. The IRS will only contact you if your application is disallowed.
Note that if you don’t make a payment for taxes owed by the regular tax deadline, you could be liable for penalties and interest, even if you’ve filed for an extension.
To file for a tax extension, use the form that corresponds with your business type:
Partnerships – March 15, 2017
To qualify for an automatic 7-month extension, use Form 7004.
Corporations – April 17, 2017
To qualify for an automatic 6-month extension, use Form 7004.
Sole Proprietors – April 17, 2017
To qualify for an automatic 6-month extension, use Form 4868.
Step 7: Check Out These Tax Deductions
The following deductions are commonly available to online sellers.
These expenses can all be deducted on Schedule C, Form 1040, unless otherwise noted.
Note that if your business is new, you’ll need to consult with your accountant as some of your expenses could fall under ‘start-up’ costs.
To qualify for the home office deduction, you need to meet three requirements: exclusivity, regularity, and precedence.
- Exclusivity: Your working area needs to be used solely for business.
- Regularity: Your home office needs to be used on a regular basis. This doesn’t need to be every day, but it should be consistent.
- Precedence: You should spend the majority of time in your home office, and conduct the most important business activities there.
To calculate your home office deduction, you can either use the simplified method or the regular method. With the simplified method, you take a standardized deduction of $5 per square foot of your home that’s used for business, up to a maximum of 300 square feet.
With the regular method, you’re required to calculate the actual percentage of your home that’s used for business by dividing the area used for business by the total area of your home.
If you calculate your deduction using the regular method, you’ll also need to fill out Form 8829.
If you are taking classes or workshops that add value to your business and/or increase your expertise, they are fully deductible.
Phone and Internet Costs
If you have a phone that’s used solely for business purposes, the cost of the phone plan is fully deductible as a utility cost. If you use your phone for both business and personal purposes, you can only deduct a percentage of the total cost of the phone bill based on how much you used your cell phone for business.
For instance, if you use your cell phone 60% for business, and 40% for personal, you can deduct 60% of the associated costs. Keeping an itemized phone bill is a good way to support your claim should you ever be audited.
If you use services such as Skype or Google Voice, you can deduct these as office expenses.
Your internet bill can also be deducted as a utility cost. If you work out of a home office and use a single internet connection, you’ll need to account for personal use. Calculate the percentage of business-related use and apply it to the total.
Web Hosting and Online Store Themes
The cost of domain registration and web hosting is deductible under other expenses. You can also deduct the cost of any online store templates or custom Shopify themes that you purchase for your business as either a software or marketing expense.
The cost of hiring an independent contractor can be claimed as contract labor.
The cost of shipping goods to your customers, such as postage and packaging costs, can be claimed as other expenses.
To deduct the business use of your vehicle, you’ll need to track your mileage for business trips. This can be done quickly with a tool such as the Shoeboxed mileage tracker. At the very least, you should record the number of miles driven throughout the year (record your odometer reading on January 1 and then on December 31), and keep a record of meetings, trips to the post office, etc. in your calendar.
Another common technique is to track business and personal mileage for a two-week period every quarter. You can use this at year-end to figure a business vs. personal use ratio.
Once you have established the total mileage driven, divide the business miles by the total miles driven, to determine your business use percentage.
Online Service Fees
Online services used for business purposes, such as Shopify, Shoeboxed, and any other apps you use to run your business are deductible as business expenses.
The cost of business equipment, such as your business computer, camera, and cell phone (if you own it outright), can be recovered either via depreciation or through a section 179 deduction. In some cases, an accountant might even advise that you deduct the cost of business equipment as a standard business expense.
It is strongly advised that you work with an accountant to properly deduct equipment costs. All of these approaches to deducting equipment costs can provide different financial benefits for your business. For example, it may be more beneficial to deduct equipment costs in one hit (using the section 179 deduction or as a standard business expense) or depreciating the cost over several years.
What’s more, different items are depreciated using different depreciation methods, and setting up a depreciation schedule can be extremely tricky to get right.
The best way to properly deduct the cost of business equipment is to keep a record of all business equipment purchases and ask your accountant to advise you on how to deduct them in your tax return.
Legal and professional fees that are necessary and directly related to running your business, such as fees charged by accountants and bookkeepers, can be claimed as professional services.
Step 8: Find the Right Accountant and Ask These Questions
When looking for an accountant to help file your taxes, take into consideration how well they understand your industry, the specific needs of your business, and whether they bill by the hour or charge a flat fee.
Once you’ve hired an accountant, ask them the following questions to see if there are other ways you can reduce your tax bill:
- Are there any local tax credits available? (this is a big one that entrepreneurs often miss)
- Does my business have nexus in any other states? Have I dealt with sales tax properly?
- Are there advantages to changing my business structure?
Over to You
Taxes probably aren’t your favourite part of business ownership but with some planning and organization you can maximize your deductions and take the stress out of tax season.
If you have any questions about preparing your online business for tax time, let us know in the comments below and we’ll do our best to help you out!
About the Author: This post is brought to you by Bench, the online bookkeeping service that pairs you with a professional bookkeeper and uses simple, elegant software to do your books for you.