Starting a business can be a turbulent process. The success of your company is riding on a lot of variables, including managing your time and money efficiently. To make things even more complicated, when it’s tax season, and you will need to fill out a return for your new company. While this might be your first time preparing a startup business tax return, it doesn’t have to be complicated. Prepare your return one step at a time and use all your available resources to make the most of your tax refund.
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The Tax Return Process for Businesses
As a brand-new business owner, you might think that you don’t need to file a tax return because you didn’t make a profit last year – or maybe your business has only just started conducting transactions. While this is a common belief among new entrepreneurs, it’s not entirely accurate. If you have received an Employer Identification Number (EIN) letter from the United States government, then you have to prepare and file a tax return for your new business. The Internal Revenue Service (IRS) sends an EIN letter to every business as confirmation for the Federal Tax ID application. If you have misplaced your letter since you have received it, the IRS can send you a replacement EIN letter.
If you have just started your business, or are waiting on your EIN letter, you will still have to file a tax return if you have done any business activities. For example, if you have hired employees, sold products, or executed a marketing campaign, you will have to prepare and file your tax return, even if you didn’t make a profit last year. Thankfully, you can benefit from any losses you experienced when you go to file your return. That’s because the current tax code allows you to use past losses to offset your annual business taxes.
Sole Proprietorship
Depending on the type of business you have, there are different forms you will have to use when preparing and filing your tax return. With a sole proprietorship, there is no separation between yourself and your business for tax purposes. This is why you are responsible for all the financial obligations your business accumulates.
For sole proprietorships, your income is considered to ‘pass through’ you. As a pass-through entity, the paperwork required for your annual tax return is less complicated compared to other forms of business. Your tax return will need to include a Schedule C for your business and an individual 1040 form for yourself. If you are entirely self-employed or responsible for paying the sole proprietor tax by yourself, you will need to use the Form 1040 Schedule SE. The Schedule SE part of the form reports the amount of taxes you owe to Medicare and Social Security.
Since you are a business owner and don’t have an employer, you will be responsible for estimating your own taxes owed. If you are expecting to owe at least $1,000 in federal taxes, you need to make quarterly estimated tax payments to the IRS. Payments are due in January, April, June, and September. It’s crucial that you pay your estimated taxes each quarter. Otherwise, you could be faced with hefty penalties and end up paying more in taxes at the end of the year than if you paid quarterly.
Partnership and Limited Liability Companies
Businesses that are considered partnerships or limited liability companies (LLCs) are a little different from sole proprietorship businesses. For LLCs with one member, you will be taxed as a sole proprietorship. The only difference is that your company is seen as a separate entity from yourself. If you have a multiple-member LLC, then you will pay taxes as a partnership. However, your business does not pay taxes as a whole. Instead, each member pays taxes based on their share of the company.
Partnerships and multi-member LLCs must file a Form 1065, which reports total income and losses to the IRS. Both types of businesses must also provide copies of the Schedule K-1 section of the Form 1065 to all members or partners. Once the members receive the Schedule K-1, the form is used to prepare their individual tax returns.
S Corporations
Less common than sole proprietorships, partnerships, or LLCs, an S corporation is more of a tax classification than a business structure. Not all startup businesses can qualify for an S corporation status, but those who do are taxed differently than other types of corporations.
Being an S corporation, the company’s income, expenses, and losses pass from the business to you, just like a sole proprietorship. That’s why an S corporation is also considered a pass-through entity. You and your other shareholders will use your business’s information on your own tax return. Any income from your company will be reported on the shareholders’ personal tax returns and will only be taxed at your individual income tax rate, which is one of the main benefits of using the S corporation status for your business. Even though your startup won’t be taxed at the corporate level, you will still have to file a tax return for your company.
To file the tax return for your startup, you will have to use the Form 1120S. This form is the standard tax return for S corporations as it reports your business deductions, gains, earning, and losses from the previous year. When filling out the tax form, you will need to have records of your company’s gross sales, profits, business expenses, and any estimated taxes you owe. Your business won’t be taxed off this form, but the IRS still needs to have accurate information on the return.
Like partnerships and multi-member LLCs, all shareholders must receive a copy of the Schedule K- 1 section of the Form 1120S. Shareholders will then use the Schedule K-1 section to report the business’s income on their own tax returns. Your business will not be double-taxed since taxes are only paid at the shareholders’ level.
Tips for Preparing Your Return
No matter what type of business you filed a return for, it’s essential to follow these tax tips to ensure you get the best refund back. A bigger refund check means you can reinvest more back into your business.
Claim Your Business Expenses
As a company owner, you can use tax-deductible business expenses on your return to lower your taxable income. Costs like office rent, supplies, insurance, or advertising can be deducted as long as they are deemed to be ‘ordinary and necessary’ in the operation of your business. You will want to use as many tax deductions as possible to help reduce your taxes owed. A business deduction could even make the difference between owing taxes and getting a tax refund.
Organize Your Records
If you don’t already have a system in place to organize your business’s records, tax season is the perfect time to get them in order. To file your startup’s tax return, you will most likely need to use your company’s records of sales, earnings, and losses. If you cannot easily find these documents, filing your tax return will be more complicated and stressful. Save yourself some stress, and spend some time organizing your records before preparing your tax return.Â
Receive Your Refund Through Direct Deposit
After you have filed your tax return, it might take up to a month to get your refund. To help speed up this process, you should elect to have your refund directly deposited into your savings account. If you don’t already have a specific bank account for your business, you should consider setting one up immediately. You can save yourself a trip to the bank and simply set up a savings account online. Then once you have a routing and account number, you can have your refund directly deposited into your account. This form of payment will speed up the process of your return by weeks, and the sooner you get your refund, the sooner you can start using that money for your business.
Ways to Invest Your Tax Refund
After waiting for your refund, you have finally received it. Now all you have to do is figure out the best way to spend it on your business. Depending on the type of business you own, here are some excellent ideas for reinvesting your money into your startup.
Upgrade Your Equipment
If your business relies on computers, printers, or machinery, you could consider updating your current equipment. With today’s technology constantly being improved, it’s easy to find yourself using obsolete, outdated equipment. If your refund isn’t large enough to buy a whole computer or printer, you could use some of your money to upgrade software like video editing programs or audio recording systems. Small upgrades can still have a significant impact on your startup.
Invest in Digital Marketing
Advertising is a crucial part of any successful business, and as a new startup, there are many marketing activities you should be doing. If you haven’t already started advertising online for your business, this could be an excellent investment of your refund. Using a social media channel is a quick and cheap way to build brand awareness without investing thousands of dollars in traditional media channels. Digital marketing is also very trackable. That means you can get exact figures for marketing metrics such as engagement, reach, and impressions. Using your marketing data, you can then know what advertisements are most effective for your target market.
Improve Your Website
With a brand-new business, you might not have had the time or money to create a state-of-the-art website for your company. With some extra cash set aside, you could take some time to hire a professional analyst to suggest possible upgrades to your site. Since your website is your virtual storefront, potential customers will be shopping online before they come to visit your physical location. To make sure your website is converting visitors into customers, you should invest in improving the SEO value, structure, and navigation of your website.
Save Your Refund
Of course, if you are planning to fund a future project or aren’t sure what you should invest your money in, you can always save your refund for the future. You never know when tough circumstances will affect your business, and by planning ahead, you can stash away your money in the case of an emergency. Saving your refund is an excellent way to protect your business from unforeseen financial troubles.
Whether you decided to spend or save your refund, you should make sure it’s a beneficial decision that can help your business. There are many ways to make your startup a success, but it won’t be possible without strong financial management. Take time to research your options, and if you decide to purchase new equipment or implement a marketing campaign, do so to build and strengthen your startup.