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How to do Taxes and Tax Return My Startup?

A sign advertising the professional tax services.
A sign advertising the professional tax services. (Photo by Jon Tyson on Unsplash)

If it’s tax season and you are looking for information on how to do taxes for your startup, you’ve found it! This guide can help you if you are preparing to do your startups taxes, doing them, or planning ahead so that you don’t freak out when it’s time to file your taxes. 

If you are operating a simple startup that does not require you to do advanced accounting, this guide may be all you need. However, if you are a manufacturing or product-based business with inventory, machinery, depreciation costs, and other accounting matters, you will most likely need to do more research on how to file taxes before you get down to business. 

Whatever the case, let’s review the filing basics for startups.

Which tax forms do I use?

Startups file tax returns based on their business entity formation (e.g., limited liability company, S corporation, partnership). The tax forms used with the listed business entity formations are shown in the chart below. 

Business Entity Formation Tax Filing Form(s)
Sole Proprietorship Schedule C Form
C corporation Form 1120
S corporation Form 1120-S
Partnership Form 1065 and Schedule K-1 Form

What are the tax filing deadlines and filing extensions?

Different business entity formations also have different filing deadlines. You should file your startup’s tax return by its deadline to avoid penalties. 

Business Entity Formation Tax Form Filing Deadline
Multi-Member Limited Liability Company, S corporation, C corporation, Partnership March 15th; 

with extension September 15th 

Single-Member Limited Liability Company, Sole Proprietorship April 15th;

with extension October 15th 

Corporations that end their business for the tax year on December 31st, Multi-Member Limited Liability Companies taxed like C or S corporations. April 15th;

with extension October 15th 

It is important that you file your taxes by the applicable filing deadline. If you do not file your startup’s tax returns by the set deadline, you will be charged a late filing fee. The late filing fee is equal to 5% of the taxes that you owe for each month that you owe taxes. This can be compounded up to a maximum of 25%.

If you file your tax returns more than 60 days after the filing deadline and you don’t have a filing extension, then your minimum penalty is US$210 or 100% of the owed taxes.   

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Electronic Tax Filing System 

Tax returns can be filed electronically or by mail. Electronic filing, also known as e-filing, is faster and more efficient than filing by mail. In addition, you get an electronic confirmation that your tax return was received and accepted by the Internal Revenue Service (IRS). You can also pay any taxes owed via the EFTPS system. The online payment system is easy to use and making the payments can be done quickly.  

Filing for an Extension

If you are certain that you cannot file your tax return by the filing deadline, request a filing extension from the IRS. An IRS tax filing extension will allow you to avoid late fees and penalties when you file your tax forms after the filing deadline. Note, you will still be required to file your startup’s tax return by the fall. Moreover, you are still expected and required to make your estimated quarterly tax payments.

What information do I need to complete the tax forms?

Person completing IRS tax forms.
Person completing IRS tax forms. (Photo by Dimitri Karastelev on Unsplash)

You will need specific information to complete the tax forms. The information that you will need is listed below. 

Personal/Business Information

You must input the filing information into your tax forms.

  • Your legal name
  • Business Tax Identification Number
  • Your Business’ Addresses
  • Your Percentage of the partnership or business
  • Date of Ownership Acquisition
  • Business Distribution Details (Information about anyone who receives a distribution from the business)

Your business information should be correct and consistent from year to year. The IRS will compile a file about your business using your personal/business information. Moreover, if the information put on the forms is inconsistent, you are more likely to be audited by the IRS and your tax refund (if any) delayed. So, check, double check, and triple check the information that you put into your tax forms.

Financial Records

Woman looking through financial file folders.
Pulling the financial documents you need to complete your startup’s taxes. (Photo by Edu Grande on Unsplash)

When you sit down to complete your startup’s tax return. The main financial statements that you should collect for your tax preparation include the:

Income Statement

This financial statement lists your revenue, expenses, and cost of goods and services.

Balance Sheet

A financial statement that lists a business’ equity, assets, and liabilities.

Bank and Credit Card Statements

Monthly statements that list the startup’s monthly bank balance and credit card account balance. 

Payroll Information

Put together the payroll documentation that shows the amount of employee and non-employee (i.e., independent contractor) compensation paid out during the tax year. You must also know to whom the compensation was paid and the status of the person who received the compensation. For example, compensation paid to employees may be accompanied by employee benefits, and payroll taxes withheld by your business for each employee. 

Prior Year Tax Return

Have a copy of the previous year’s tax return and have it available when you fill out the current year’s tax forms. You will need some information from the form, but you also want to make sure that your tax deductions, credits, and other expenses are consistently classified in your return, or that you have good, documented reasons for changing their classification from one year to the next. 

For example, when filling out your 2022 tax filing forms, keep a copy of your 2021 tax return available for reference purposes. If you didn’t file a tax return for your business in 2021, no problem, all businesses have to start from somewhere

Partnership Agreements

If you have a partnership agreement, have copies of all the agreements available so that you can report your percentage of ownership of the business or your percentage of its distributions. 

Accounting Records

Collect, in one place, all the accounting records that you can use to substantiate the claims on your startups tax forms. The documents assembled may include receipts, invoices for orders, and credit memos. 

Asset Acquisition Information

Put together copies of the records of your asset purchases from other companies. You will use these records to list the initial value of your assets and how you decided to depreciate them over time. 

Depreciation

Depreciation is the value of a long-term asset lost that declines in value during its useful life. There are different depreciation methods that can be used to depreciate assets over an extended period of time. Note, asset depreciation can also be accelerated if certain tax deductions are taken or more aggressive depreciation methods are used by the business owner.

Receipts

Ledger full of accounting information.
Use your ledger to calculate your business expenses. (Photo by Pixabay)

Have the original receipts or copies of them ready for your tax preparation session. The receipts are your proof that your business spent money on business-related goods and services. The receipts are your proof that the business deductions for operating expenses and cost of goods and services are legitimate. Note, bank records are not considered an acceptable substitute for receipts that record the transaction. 

Your startup’s receipts should be kept by the business for at least 6 years after the tax return has been filed and accepted by the IRS. Within that time period, the IRS may audit your startup’s tax returns and supporting business documentation and receipts. 

Tax Deductions and Credits

Picture of US$100 bills laying on top of each other.
Hundreds to thousands of dollars lost to depreciation. (Photo by Giorgio Trovato on Unsplash)

You can reduce your taxable business income by deducting your startup’s business expenses from your taxable income. The business expenses are the costs paid to earn your income. Tax credits, on the other hand, are applied directly to the money that you owe the government. 

Some examples of business expenses are: 

  • travel expenses
  • home office business expenses
  • business insurance costs 
  • employee compensation 
  • employee benefits. 

Examples of tax credits for 2022 are:

  • Employer Credit for Paid Family and Medical Leave
  • Credit for Employer Differential Wage Payments
  • Alternative Motor Vehicle Credit
  • Credit for Employer-Provided Childcare Facilities and Services
  • New Markets Credit
  • Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips

Estimated Tax Payments

Your startup is expected to pay quarterly estimated taxes based on its anticipated quarterly earnings. If your estimated tax payments exceed the taxes due on your taxable income, then you will get a tax refund. However, if your estimated taxes for your business are less than what is due based on your taxable income, then you must pay the taxes that are owed when you file your startup’s tax forms.

Professional Accounting and/or Tax Services

Business owners getting professional advice from an accountant.
Business owners getting professional tax advice from an accountant. (Photo by Tim Gouw on Unsplash)

Before submitting your startup’s tax forms for IRS review and approval, have a professional accountant, bookkeeper, or tax preparer review them. The financial professional can check if your tax forms are accurate, suggest tax deductions and credits, and suggest things that you can do during the new tax year to reduce your taxable income.  

What taxes should you consider when filing your business tax return?

When seeking ways to reduce your taxable income, consider all the taxes that your business has paid during that year and are responsible for paying at the end of the year.  

Let’s review some taxes that your startup may have paid during the tax year. 

Payroll Taxes

Tax forms needed to declare taxes withheld during the year.
Filing your startup’s payroll with the IRS. (Photo by Kelly Sikkema on Unsplash)

Payroll taxes are taxes that must be paid on an employee’s wages, earnings, and tips. The taxes are withheld from the employee’s compensation and paid to the government. Each state has specific rates and deposit schedules that determine how the taxes are to be paid to the state by the business. 

Federal Income Tax

Federal income tax includes any taxes paid to the federal government on income earned by the startup. 

FICA Taxes

Social Security and Medicare contributions.

FUCA Taxes

Unemployment insurance contributions

State Income Tax

Most states in the USA tax a business’ income. The taxes paid to the state on the business’ taxable income is deductible from the business’ taxable income.

Local Income Tax

Your startup may be required to pay city or county taxes on its taxable income. Those taxes can be deducted from your state taxable income. 

Franchise Taxes

Franchise taxes are taxes that a business pays to incorporate or do business in a state. A business may also be required to pay a franchise tax to a state that it does not reside in but has a nexus (i.e., minimum economic connection) based on the guidelines set for determining whether an economic nexus exists between your business and that state. 

These taxes may be a percentage of your startup’s assets, net worth, capital stock, or a flat or minimum amount of money.

Limited liability companies (LLCs), corporations, and partnerships are required to pay franchise taxes in states where they do business and that requires them. Businesses may also receive an exemption from franchise taxes. 

The taxes are assessed and filed annually. Note, the deadlines vary by state. 

Failure to pay your franchise taxes may result in your business not being able to operate in the states where your startup owes them. 

Sales Tax

Most states within the United States require sellers and buyers to pay income tax on goods and services bought and sold within their states. 

Wrap Up 

Making a checklist of informaton and tax forms needed to file a startup's tax return.
Planning your tax preparation and getting all the information needed in advance. (Photo by Suzy Hazelwood on Pexels

When completing your startup’s taxes, make sure that you have gathered all the information needed to complete your tax returns. This is more easily done if you have a checklist. So, make out a detailed checklist of what you need before you start working on the tax filing forms, or having someone else do it for you. If you do this, the actual time spent completing the forms will be much less than if you have to constantly start and stop because you don’t have all the documents and information that you need to do the job. 

If you decide to complete the forms yourself, have a professional accountant, bookkeeper, or tax preparer review your tax forms before you submit them to the IRS. A tax professional may correct some errors on your forms, and may be able to help you find more tax deductions and credits. 

Finally, when you have a tax professional review your tax forms, make sure you ask the professional how you can reduce your taxable income in the future, and if there are better ways to depreciate your assets. Let the professional help you to maximize optimize your tax benefits, credits, and depreciation costs.

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