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Your ultimate guide to fearless filing

Jan 12, 2018 | 4 minutes read | Accounting & taxes

Year end can be pretty stressful, especially for a new business owner. There’s a lot of information out there, but you can easily get lost in a sea of links and foreign terms.

We combed through tons of resources to put together an easy guide for first-time filers, as well as anyone looking to better understand what their accountant is saying. Check out these two common scenarios to understand how to prepare for year end and keep your accountant happy.

Scenario #1: Sole proprietor

Lucy brings in about $20,000 as a part-time graphic designer. She’s about to file her business taxes for the first time, so she’s working with an accountant to help her figure out how to file and what she can write off.

Filing taxes as a sole proprietor

Lucy has what’s called a sole proprietorship, meaning she’s the only owner of her business and it’s not incorporated. That means Lucy will file her personal and business taxes together using a Schedule C (Profit or Loss for a Small Business) with her Form 1040, rather than filing a separate business tax return. On Line 1 (“Gross receipts or sales”) on the Schedule C, Lucy will report all the income she’s made throughout the tax year.

Because Lucy’s self-employed, she needs to keep track of her income from all sources—cash, check, card payments—as well as anything her clients report on 1099 forms. She’ll pay income tax and self-employment tax on her net profit, so she needs to make sure to capture all possible expenses in her Schedule C to help reduce the bill.

Ways for sole proprietors to save on taxes

Lucy works from home, so she can deduct some of her housing costs on a Form 8829 (Expenses for Business Use of Your Home), including rent or mortgage payments, insurance and utilities.

Whether she can expense it or not, and how much, depends on the square footage of her home office, and how that space in her home is used. After speaking with her accountant, they decide Lucy can write off 5% of her home expenses.

She can also claim deductions on any business assets she bought for the business that lose value over time, known as depreciable property. In Lucy’s case, this means the new laptop she bought last month. She’ll fill out a Form 4562 (Depreciation and Amortization) to capture the true value of her laptop.

Lucy works from home and drives to meet her clients wherever they choose, so her accountant says she can enjoy the benefit of deducting some of her car expenses. She can use the current standard mileage rate to calculate her expenses, which takes into account gas, oil, insurance, car payments and repairs. This wouldn’t be the case if Lucy was commuting to and from a rented office every day and meeting clients there.

Lucy often picks up the bill for a coffee, drink or meal when she meets her clients. She can deduct 50% of the cost of those expenses, as long as business was discussed when they met. She can also fully deduct the cost of flights, taxis, airport parking, hotels, and a daily meal allowance from the design conference she attended earlier in the year.

Pro tips for sole proprietors:

  • Try to forecast your income and expenses based on the last year, and estimate how much you’ll owe in taxes using an online calculator.
  • Have a plan in place to save each month for the taxes you’ll owe at the end of the year so that it doesn’t become an unexpected expense that derails your business or personal finances.
  • Set up a system to manage your receipts, bookkeeping, and tax payments so that you have accurate records ready when tax time comes around again.
  • Make sure you know your tax deadlines and set calendar reminders.
  • Check Publication 535 for different business expenses you can write off.
  • Check Publication 463 for current mileage rates and accepted travel deductions.
  • Check Publication 1542 for current per diem rates and other information related to travel, meals and entertainment.
  • All tax codes have loopholes and exceptions, so it’s important to talk to a tax professional about what deductions apply to your personal situation.

Scenario #2: Partnership

Roger and two of his friends started an IT service company a few months ago. Their business is a general partnership, where each of them has an equal share in the business. Roger freelanced before, so he’s always filed taxes as a sole proprietor in the past. This is his first time filing taxes as part of a partnership, so he’s asked a tax expert to walk him through it.

Filing taxes as a partnership

There are two parts to filing taxes as a partnership. Income from the business itself gets reported on Form 1065 (U.S. Return of Partnership Income), and the individual partners each file a Schedule K-1 form based on their personal share of the business.

Roger and his partners will give their accountant a Profit and Loss Statement (also known as an income statement) showing the net income or loss, revenue sources, and deductible expenses. They’ll provide balance sheets for the beginning and end of the year. No tax will be calculated or paid from the 1065 form because partnerships are considered “pass through” businesses, where taxes pass through the individual owners.

Each partner will need to give their accountant their original partnership agreement so that their personal shares of the information captured in the 1065 can be recorded in their Schedule K-1s. They’ll need to show their share of the profits, losses, capital and liabilities at the beginning and end of the tax year, as well as their share of income and any money paid out to each partner.

They’ll want to capture all of their deductible business expenses on the Schedule K-1, such as rent, maintenance costs, taxes, licenses, permits, and employees’ pay. They’ll also capture any non-deductible expenses on the form, and other details about the partnership.

The 1065 and Schedule K-1 get sent to the IRS together, while the partners’ personal tax returns are filed separately.

Pro tips for partnerships:

  • Set up a system to manage your receipts, bookkeeping, and tax payments so that you have accurate records ready when tax time comes around again.
  • Go through your books on a regular basis (monthly or quarterly) so that you’re on top of everything.
  • You should have a plan in place to save each month for the taxes you’ll owe at the end of the year so that it doesn’t become an unexpected expense that derails your business or personal finances.
  • Make sure you know your tax deadlines and set calendar reminders.
  • All tax codes have loopholes and exceptions, so it’s important to talk to a tax professional about what deductions apply to your personal situation.

The trick to making tax time less stressful is preparing ahead, and keeping to a schedule throughout the whole year. And make sure you pull in an accounting professional anytime you feel like you’re in over your head—you’ll thank yourself later!

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