This is a guide that can help a small business prepare for and file tax returns. It helps
the business prepare the proper documentation required for tax returns. This guide
includes information about whether an attorney is needed, how to find a reputable
attorney, and includes a frequently asked questions section. In addition, this guide
provides tax information about every type of business classification, from partnerships to
corporations. This guide can be used by small businesses or other entities that want
more information about how to plan and prepare for tax returns.
A TAX GUIDE FOR THE SMALL BUSINESS OWNER
How to use this guide:
Owning your own business can be a rewarding venture. There are a lot of necessary details to
attend to, including dealing with taxes. Most people perceive taxes as complicated and perhaps a
bit mysterious. This guide will give a broad overview what a small business should be aware of.
It will also answer some frequently asked questions. This is guide is not a substitute for legal, or
tax advice. Should you have any questions you should consult your tax professional or lawyer.
Do I need a lawyer?
You generally do not need a lawyer to attend to the tax matters of a small business. However, if
you have a complex situation or have any questions or it always wise to get legal advice.
How do I find a reputable lawyer?
The law is a huge field and each subject is fairly vast, so find a lawyer who is well versed in tax
law. There are many resources available to find counsel in your area by through the phone book,
the internet, or even word of mouth. If you are interested in using a particular lawyer but aren’t
sure, contact the local Bar Association and see if the lawyer is in good standing. Most lawyers
will give a free initial consultation. This would be a good time to size up your lawyer, ask a lot
of questions and get a general feel for their knowledge in the area.
Do I need an accountant?
Whether or not you need an accountant depends on the complexity of your current situation.
Some are perfectly comfortable planning and preparing their own taxes. Others are not. The
more complex your financial situation, the more likely it is that you will need the guidance of an
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How do I find a good accountant?
There are numerous ways to find a good accountant. You can use the yellow pages, word of
mouth, local business associations or the internet. Once you have narrowed down your choices,
it’s a good idea to interview them. Ask them what services they can provide, what are their
strategies for saving you money? Choose someone that has broad experience and has a solid
understanding of tax planning and preparation.
Frequently asked questions:
Does what kind of business I am in change the amount of taxes I pay?
When you start a business, one of your first decisions will be what your business structure will
be. Each structure has its advantages and disadvantages, and they are all taxed differently.
What kind of business structures are there?
The types of business structures are:
Limited Liability Companies.
How do the different business structures effect how I am taxed?
Sole proprietorship: With a sole proprietorship, you are a one-man business. Because the
person and business are one in the same, you would report your business income and losses on
your personal tax returns.
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Partnerships. With a partnership the partners pay taxes of their share of income from the
business on their personal tax returns.
Corporations. Corporations are considered a separate legal entity. The corporation itself pays
the taxes. The owners only pay personal income tax on the money they draw from the company.
Limited Liability Company. Owners of a limited liability company pay taxes similar to a
partnership. The owners pay taxes on their share of the business income on their personal tax
What is business Income?
The IRS taxes the income from a business. So whatever you can do to decrease the amount of
income, via deductions, is extremely helpful. The tax code defines income as any and all income
from whatever source it is derived. This includes not only cash, but goods and services.
Constructive income is when you have received something, “whether you put your hands on it or
What does not count as income?
Some types of income aren’t taxable. They include fringe benefits, return of capital, and tax free
What are the some small business tax deductions I can use?
The tax code allows the business owner to deduct the expenses of doing business from their
gross income. What is left from this is business profit, which it what you are taxed on. So you
want to be sure and avail yourself of as many deductions as possible. The following are the most
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Ordinary and Necessary Expenses. The IRS allows the business owner to deduct business
expenses that are considered “ordinary and useful.” The IRS does not specifically define what
this exactly means, so it is up to the business owner to use their own discretion here.
Auto Expense. If you use your car for business, you can deduct some of the costs.
Education Expenses. If the education relates to your current business you can write off the
Starting a Business. If you a building a brand new business you can deduct capital expenses.
Hiring Employees. You can deduct most or all of what you pay in salary to an employee as a
Legal Fees. Money spent on lawyers and accountants is deductable.
Entertaining Clients. You can deduct 50% of the cost of entertaining prospective clients.
New Equipment. You can write off the costs of new equipment.
Advertising. Costs associated with advertising are deductable.
Travel. Business travel is deductable, including cars, hotels, airfare, dry cleaning, phone calls,
Software. Software purchased for business is depreciated over a period of 36 months but there
are a few exceptions;
Moving. If you moved because of your business you may be able to deduct some of the
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Interest. If you used credit to finance business purchases you can write off the interest;
Charity. If you own a LLC or corporation you business can make a donation to charity and the
deduction can pass through to your personal income taxes.
Taxes. The taxes incurred operating your business are deductable.
Can I deduct expenses for my home office?
If you use a home office, or a portion of your home for business, you may be able to write off a
portion the expense. You can write off such things as utilities, rent, depreciation, real estate taxes
and more. In order to use your home office as a write off however, there are a few requirements
that must be met.
What are the requirements to be able to write off your home office?
Regular and Exclusive Use. You must use the office regularly, and exclusively for business.
Principal Place of Business. You must be able to prove that your home office is your principal
place of business.
What is a hobby business?
A hobby business is usually run out of your home, and could be based on something recreational
in nature. The benefit here is that even though the business may not make much money, it can
provide a tax shelter of sorts. You are able to deduct the losses from your business and lower
your taxable income.
What is a current expense vs. a capital expense?
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This addresses when you can take a particular deduction. Current expenses are every day costs
associated with keeping your business running.
Capitalized Expenses. Some business expenses have to be handled in a different way. Costs of
equipment, land and vehicle deductions must be taken over a course of years rather than all at
once. The general rule is that if an item has a life of one year or longer it must be capitalized.
I am self employed. What do I need to watch out for?
Self-employed people are general watched a little more closely by the IRS. Therefore there are a
few things to always keep in mind: be scrupulous about claiming ALL of your income, and do
not take frivolous deductions or for things you did not pay for.
What do I need to know about paying my payroll taxes?
The IRS takes the non-payment of payroll taxes quite seriously. Always be sure to make your
payroll tax deposits on time. The penalties for late payroll taxes or worse yet, non-payment are
I receive a lot of my income in the form of cash payments. How should I handle this?
The IRS requires that cash business transactions over $10,000 be reported on IRS form 8300.
Failure to report cash transactions and file this form can actually get you in very hot water.
There are fines and you may be investigated by the IRS criminal investigation Division.
I have just been audited. What do I need to know?
Prepare for the audit and learn what they will be looking for. Some things to watch for are:
Do you handle a lot of cash transactions?
Do you use your business auto for personal use?
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Does you lifestyle not match your income?
Do you write off personal expenses as business?
Are you paid up on all your payroll taxes?
Do you employ private contractors?
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What are some ways I can avoid an audit in the future?
Keep scrupulous business records. This helps the business owner in a multitude of ways. It
will assist you in preparing the most accurate returns possible, but will also help you immensely
should you ever be audited.
Keep all of your accounting consistent. There are different methods to accounting, cash and
accrual. If you decide to switch from one accounting method to another you first need to receive
IRS approval to do so.
Be careful categorizing private contractors. Employees are commonly miss-categorized as
private contractors. There are criteria published by the IRS to correctly determine this.
I have used all possible deductions. Are there any other ways to reduce my tax burden?
There may be a few ways to reduce you burden that you are not aware of. They include:
Hire Family Members. If you hire family members you do not have to pay federal
unemployment taxes, you may not have to withhold income taxes or pay social security if your
children work for you.
Hire Independent Contractors. You do not have to withhold state or federal income taxes
from their earnings.
Pay your Bills by the End of the Year. If your business expenses are due after January 1st, pay
them in December so you can use them as deductions for that tax year.
Give to Charity. The IRS gives tax deductions for donations to charity. Before giving, make
sure that the charity is qualified and the donation will be tax deductable.
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Hire Katrina Victims. There is something called The Work Opportunity Tax Credit, which are
incentives to encourage hiring particular individuals that have a high unemployment rate. That
credit includes victims from Hurricane Katrina. For each employee hired, you can claim a
deduction up to $2,400. Hiring people involved in the welfare system is similar, where the
business can claim $9,000 over two years for hiring someone in this category.
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Steps to Tax Preparation for Small Businesses:
Start with your business structure as the base;
Keep scrupulous records throughout the year;
Stay involved during the year with employing tax planning strategies and maximizing
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