Business Tax Returns for First-Time Filersadmin
First-time business owners have a lot on their plate, and much of it comes with a steep learning curve. You might make some mistakes along the way, but hopefully, you’ll be able to learn quickly and build a thriving business. One thing you can’t afford to mess up though is your business’s first tax return. Reporting business income incorrectly can result in serious complications and potential fines from the IRS. If you’re a first-time business owner, here are a few tips on business tax preparation.
Cash or Accrual?
One decision you’ll have to make as a business owner is whether you want to report your income on a cash basis or an accrual basis. Reporting on a cash basis means that you recognize your income only when you’ve actually received it from your clients. If you report income on an accrual basis, you report any income you’ve earned, even if you haven’t actually been paid yet.
For example, let’s say you performed a job for a client that ended just before the end of the year. The work is completed, but you weren’t paid before the new year began. If you’re reporting on a cash basis, you wouldn’t include the income from that job on that year’s tax return. However, if you’re reporting based on an accrual basis, you would report it on that year’s return.
If you’re not sure what to pick, it’s best to consult with a financial adviser or business accountant. However, many new businesses find it most beneficial to report on an accrual basis. This is because most new businesses have more unpaid expenses at the end of the year than they do uncollected income. Reporting on an accrual basis allows you to take those net expenses as an additional deduction.
Remember Home Office Deductions
If you use a space in your home to do business, remember that you can deduct a portion of your home as a business expense. This deduction is frequently contested by the IRS, however, so it’s important that you are only taking this deduction if the area of your home is exclusively used for business. This means that if you work out of your home office, but your children also use the office to do their homework, you can’t claim the home office as a business deduction.
As long as you’re using the space exclusively for business purposes, you can measure the square footage of the space and calculate what percentage of your home’s total square footage the room accounts for. You can then deduct that percentage of your home expenses, such as real estate taxes, mortgage interest, etc. You should always consult a CPA when trying to claim this deduction.
Track Vehicle Expenses
If you drive your car for business purposes, it’s important to keep a detailed log of business-related mileage and expenses. Business-related travel would include driving to meet with clients, to business conventions, or to your various business locations. You will want to track the beginning and ending mileage on your odometer for each trip, as well as the date and purpose of the trip.
Speak with an Accountant
While individual tax preparation, is largely manageable on your own, business tax returns are much more complicated. It’s incredibly important that you work with a tax preparer who’s experienced in handling business returns o ensure that you’re getting every possible deduction and reporting your income and expenses properly. This is especially true for first-time filers who have never filed a business return before.