This guide provides an overview of federal tax filing for small business owners operating as a sole proprietor or limited liability company (“LLC”). Even businesses who rely on an accountant or other professional to prepare taxes should be aware of the process and requirements related to the annual filing of income taxes. The information below includes details on required forms, documentation to collect and keep, common deductions, deductions to avoid, filing deadlines and online resources.
- Schedule C: Small businesses with one owner are structured as either a sole proprietor or a single-member LLC. Both types of businesses report income and losses on Schedule C (Profit or Loss for a Small Business), which is an attachment to the owner’s personal tax return filed on Form 1040 (U.S. Individual Income Tax Return).
- Schedule SE: Sole proprietors with net earnings of at least $400 must complete Schedule SE (Self-Employment Tax) and submit with Form 1040. The self-employment tax rate is 15.3 percent and represents both the employer and employee portions of the social security and Medicare taxes.
- 1099-MISC: Payments made to lawyers, unincorporated service providers and independent contractors must be reported to the recipient as well as the IRS if the amount paid totals $600 or more for the year. Additionally businesses must report royalties of at least $10 and rent for office or warehouse space. These miscellaneous income payments are reported on Form 1099-MISC. The penalty for failure to issue these forms on time ranges from $30 to $100 per form, depending on how late the forms are issued.
- Form 8829: If a business operates out of the owner’s home and meets specific requirements (see below, Conditional deductions) then the business can use Form 8829 (Expenses for Business Use of Your Home) to write off the home office expenses such as rent, property taxes, utilities, maintenance and related costs.
- Form 4562: Businesses with Section 179 property, capital purchases or an automobile must complete Form 4562 (Depreciation and Amortization).
- Supporting documentation is not submitted to the IRS but should be kept in case of future audits.
- Documents can be stored electronically instead of hard copy.
- Different types of documents have different record keeping length requirements. For example, employment tax records must be kept for four years.
- Gross receipts show the sources of business income. Common examples include Form 1099-K, which online credit card or third-party payment processors provide annually, invoices and cash register tapes.
- Canceled checks and credit card receipts are examples of documentation supporting purchases of goods sold to customers.
- Expenses, the costs incurred to run a business, are documented with invoices and receipts.
- Records for assets like furniture used in the business must be kept to prove purchase price, date of purchase, use of the asset and sale price. Deeds and titles are examples of documentation a business should retain.
Allowable deductions: According to Internal Revenue Code Section 162, “In general – There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” An expense must be common or accepted in the business’ industry, and the expense must be useful to the business. Examples of allowable business deductions include office rent, wages, insurance, advertising, legal expenses and interest payments.
Disallowed deductions: Business expenses must be easily separated from personal expenses, since personal expenses are not allowable deductions on Schedule C. Also the IRS specifically disallows the deduction of the following expenses:
- Fines and penalties
- Political contributions
- Capital expenses
- Federal, state or gift taxes
- Club dues
- Gifts over $25
- Non-uniform business clothing
Conditional deductions: Some expenses might be deductible for business income tax purposes if specific criteria is met. Home office expenses for example are deductible if the business uses the space regularly and exclusively for business-related activity. Up to 50 percent of meal expenses can be deducted, as long as the meal is directly related to the business or occurs immediately before or after a substantial business discussion.
- January 31, 2017: 1099-MISC forms must be issued to all recipients of non-employee compensation.
- February 28, 2017: 1099-MISC forms must be issued to all other required recipients. Paper filings must be submitted to the IRS by this date also.
- March 31, 2017: Electronic filings of 1099-MISC forms must be submitted to the IRS.
- April 17, 2017: Form 1040 and all attached schedules, including Schedule C, must be filed with the IRS.
- The IRS provides guides on a variety of tax topics specifically for small businesses: Small Business and Self-Employed Tax Center
- The U.S. Small Business Administration offers tax tips and other helpful resources: Filing & Paying Taxes
- Scenarios related to Section 179 property can be explored to find the business’ best options for depreciating property: Section 179 Calculator
- Multiple software options exist to help businesses better track and organize income and expenses year-round and make tax return preparation more efficient and more accurate: Top Small Business Accounting Software Choices