Business Tax Returns: The Ultimate Guide

Make no mistake: Owning and operating a business will be the hardest job you ever have. Because your job is supporting and facilitating everyone else’s job—and making sure your business thrives. Your business is your livelihood! Not only does it help you support yourself and your family, but it helps every single person on your team support themselves and their families. On top of that, you must constantly steer the ship of your business toward success and away from unnecessary peril. And one of the biggest dangers to new businesses? Business tax returns.

Your business tax returns can end up going one of two ways. Either you save a bunch of money through savvy tax strategies and helpful deductions, or you end up owing. And tax debt represents one of the greatest threats to any growing business. Unfortunately, unexpected tax debt ends up as the result for thousands of hardworking business owners each and every year. But there’s simply no need for it.

Your business tax returns should serve as an opportunity to save money and keep your business on solid financial footing.

But many small business owners run into tax issues that prevent them from reaching their full business potential.

Whether you’re filing business taxes for the first time this year or you’re just looking for ways to level up your game—we’ve got you covered. We’ve helped thousands of business owners make it through tax season. At Edge Financial, we offer turnkey solutions for business taxes, bookkeeping, even payroll. When we say we’ve seen it all, trust us. We’ve seen it all. And more than anything, we love seeing empowered business owners who can maximize their taxes.

When you view taxes as an opportunity to save and to grow your business, you’ll see the results. Luckily, we’re here to help you do just that.

Deductions & Business Expenses

1. Self-Employed

If you own your own business, you cover 100% of the expenses associated with owning and operating your own business. For instance, costs for a home office, equipment, travel, marketing, and everything else can add up. If you didn’t have access to some reimbursement for that, you’d have a difficult time keeping your business going. However, you can save thousands in deductions and business expenses each and every year.

Here are a few you should remember.

Home Office

Firstly, you can deduct the cost of any workspace you own and regularly use for your business. This includes a wide range of potential costs you may be responsible for your home business. We’ve included a comprehensive list of the costs you can possibly deduct:

• Mortgage interest
• Home depreciation
• Property taxes
• Homeowners insurance
• Home maintenance

You can deduct your home office expenses in one of two ways. To begin with, you can switch between the ways you claim the deduction between years. The only immovable qualification is that your home office does not exceed 300 square feet. In other words, a fairly large space. You could work in a 10 foot by 15 foot space and only have used half the area the IRS allows. Additionally, you cannot deduct itemized deductions related to depreciation or home-related deductions.

Calculating the Deduction

With the simplified deduction, you’ll calculate $5 per square foot up to a set maximum. Subsequently, you can deduct up to $300 square feet using this method. This method might be the best option if you don’t have a lot of time to file your taxes. You may also prefer it if you haven’t kept great records of the deductible expenses associated with your home office.

If you’ve kept up-to-speed with your bills and financial records, you need not worry about anything other than the 300 square foot deduction. If you rent a 2 bedroom apartment for $2000 a month, you can deduct one of those rooms from your monthly self-employment income. In addition, a portion of your utilities might let you deduct hundreds from your annual tax bill.

As a self-employed worker, you can find tax savings in your home office—on top of your usual self-employment deductions.

Bills & Insurance

Even if you don’t claim the home office deduction, you can still deduct a number of expenses associated with your self-employment. The most important thing to remember is to keep your deductions exclusive to your business. For example, if you have a single phone, you wouldn’t deduct the full monthly bill, which might include your personal and business use. Instead, you’ll deduct your costs specifically associated with your business.

If you pay for a separate line, which can in some cases actually save you money on your phone bill, you can deduct 100% of your business phone line. However, for a bill such as your internet, you’ll only deduct however much of your monthly bill might stem from your business expenses.

For example, if you spend $100 a month on your monthly internet bill, you might be able to deduct 25% to 50% of your full bill. And you can determine the exact amount based on the proportion of your time spent online related to your business.

Health Insurance Premiums

Additionally, you can deduct your health insurance premiums! If you didn’t already know this, then yes—you can applaud. In the United States, health insurance can cost a fortune. And that includes when you have to pay your own premiums. Fortunately, when you cannot participate in a plan through your or your spouse’s employer, you can deduct all of your health insurance premiums.

These totals include health, dental, and qualified long-term care insurance premiums. Additionally, you can deduct premiums paid to provide coverage for a spouse or dependents of age 27 or younger. You can calculate the premium here.

Meals & Travel

When you work for yourself, costs can arise that an employer might otherwise cover. For example, you might take a prospective client out for a meal or need to travel to meet with a business partner. In either case, you don’t have an employer to reimburse you for these costs. As a result, Uncle Sam is willing to step up and help you out should you accrue meal or travel costs associated with your self-employment.

A meal may qualify as a tax-deductible business expense when traveling for business or “entertaining” a client. A crucial element here: Whether or not the meal is lavish.

Assuming the meal isn’t unreasonable—think a $500 sushi and sake dinner for yourself and a prospective client—you can probably deduct a portion of it. Specifically, you can only deduct 50% of the cost if you keep your receipts for it. If you lose track of the receipts, you can deduct 50% of the standard meal allowance if you keep good records of the meal but not the receipts. And at the risk of being the bearers of bad news, you can’t deduct your usual lunch that you might eat at your desk or at home.

“What Counts as Business Travel?“

When it comes to travel, you need to keep a few things in mind. First, business travel must last longer than a typical workday. Additionally, it should require you to sleep or rest and take place away from your “tax home.” Essentially, you need to leave town for at least a night.

Of course, for your business trip to count, you’ll also need to have a business-related reason to travel. This could include finding new customers, meeting clients, attending a conference, or taking a seminar. But it doesn’t include that random connection you might hand a business card while out at dinner.

Retirement Planning

As a self-employed person, you don’t benefit from some of the same matching and alternative savings programs that certain employers offer. Fortunately, you have a number of tax-deductible options available to you.

If you don’t have any employees, there’s a chance you can set up an individual 401(k) plan. You can contribute a surprisingly high amount of your income per tax year as a tax deferral. And you can contribute another 25% of your net income, which lowers your taxable income significantly. As a savings-minded professional, you can offset your taxable income and put some solid money away for your future. Talk about a win!

Qualified Business Income Deduction

2. Running a Family Business

When you own and operate a business with your family, you’ll need to keep a couple of things in mind regarding your business taxes. For example, some differ from the tax laws that govern the self-employed. Meanwhile, some remain pretty similar.

Education Benefits

In certain instances, helping your employees to gain valuable job skills and additional education can come tax-free. In most cases, when you provide education benefits to employees, they will remain excluded from taxes to your employees—up to $5,250 per year.

To achieve this, you’ll need to provide these expenses through a written (and well described) Educational Assistance Plan. This plan should spell out the following:

• You cannot provide employees with cash or other benefits instead of assistance to their education.
• Also, you must give “reasonable notice” of the program to any employee who provides. This means you can’t pick favorites, and the plan must apply to every eligible employee.
• In short, you cannot favor high paid employees.
• More than 5 percent of benefits from this program cannot go to owners, spouses, or dependents (or shareholders).

Details on the Benefits

Generally, the educational benefit needs to apply to your business. So the IRS might have trouble getting on board with your HR Director getting their MFA in Creative Writing. And they can’t help an employee qualify for their own, current job. So, a person required to have a BS in corporate communications can’t use an education credit to acquire a BS in corporate communications.

If you can check all these boxes, your continuing education credits can also count as a business expense! So not only can you help your employees improve their knowledge and grow your business, you can save on your business tax returns, too!

Retirement Planning

When you own and operate a small business, your employee benefits become yours to deal with. And this includes retirement planning.

To save money on your own business taxes, try setting up a Savings Incentive Match Plan for Employees IRA—or a SIMPLE IRA. Using a SIMPLE IRA plan, you can both contribute to your employees’ retirement and also your own. And a SIMPLE IRA will also benefit you on your taxes! With this plan, your employees under the age of 50 can contribute up to $13,000, or for ages 50 and up, up to $16,000.

Another plan which can help you on your taxes: the SEP IRA. The Simplified Employee Pension IRA allows you to personally contribute up to (the lesser of) 25% of your income or $56,000. The IRS restricts how much you can personally contribute, unless your eligible employees also contribute. But this can become another retirement plan that benefits both you and your employees from a tax perspective.

Salaries & Employee Benefits

This one probably either surprises you or seems like the most obvious write-off yet! But yes, you can deduct employee salaries and benefits.

Remember, you can calculate your business income (and therefore, taxes) based on a relatively simple calculation. What did you earn from running your business, and what did you have to pay to make your business run?

Salaries and benefits, including those we didn’t mention in the retirement or education sections, definitely count here. On your business tax return, ensure you include all the wages you paid to your workers—whether they come in 40 hours a week or work on contract.

Interest on Debts

As a business owner, of course you’d rather avoid getting yourself and your business into debt. But in certain cases, growing your business or getting through a rough patch may require taking on debt.

Fortunately, the IRS allows you to deduct interest on these debts. From mortgages, like we mentioned, to lines of credit, you can deduct it on your business tax returns.

Gentle Reminder: No amount of tax deductions will save you from overwhelming debt. Taking on loans comes with inherent risk. And you should always carefully consider that risk and your options before taking it on.

The Importance of Good Bookkeeping to Business Tax Returns

The success of your business tax returns relies on well-kept business records. And the only way to ensure thorough business records is to maintain them year round. The solution? A centralized system for payroll and bookkeeping.

Now, this may seem like an obvious move to the owner of a large business. Books and payroll are naturally labor-intensive processes, so you may have an automated system or a team of professionals. But for small or mid-sized businesses, you may not yet have set up the infrastructure—or you simply can’t afford the salary and benefits associated with a dedicated team.

And with unrefined systems comes unexpected issues. While filing, you may discover you’ve missed a number of expenses you qualified for, missing out on savings. Or on the other hand, perhaps you weren’t adequately handling your payroll taxes. As a result, this mistake could put you thousands of dollars into the hole for just one employee!

While we recommend you always hire a professional, we won’t belabor the point here. We think the results speak for themselves. And the results are impeccable business records that will make filing your business tax returns easy.

Other Tips for Filing Your Business Tax Returns

1. Stay Organized (if You’re Self-Employed)

We’ll admit it. We may harp too much on this one. But on second thought, is that really possible? Your organization is paramount to an efficient and error-free tax filing process. And you probably have a lot more paperwork for your business than you do on your individual taxes.

However, tax filing tends to become an organizational issue more for the self-employed than it does for a company with an accountant, bookkeeper, or dedicated finance professional. Typically, when you run a business with one of these people in place, you probably have the infrastructure set up to keep track of the important documents.

As a self-employed person or the owner of a small business who hasn’t quite grown large enough to warrant bringing on a full-time accountant, stick to the basics. That is to say, you can save yourself a very frustrating tax season by organizing your tax documents like an expert.

2. Know Your Filing Dates

Depending on the structure of your business and the forms you use to file your business tax returns, you may not always file on the traditional “Tax Day.” For example, a Schedule C tacks on to your Form 1040 without requiring a different deadline.

For instance, as a C-Corp, you’ll file a Form 1120. Your date is no longer April 15 (or in 2020, July 15). Instead, you need to file by the 15^th day of the month after the close of the tax year. For most, but not all filers, that date is April 15^th. Even more confusingly, as an S-Corp you need to file your Form 1120S by the 15^th day of the third month after the Tax Year. Specifically, usually March 15.

You get what we’re trying to say here? Things might differ based on your business, so you need to stay up to speed with your tax filing deadlines. Not doing so could cost you thousands.

Business Tax Returns FAQs

1. What happens if I get audited?

The IRS can audit any business tax return or personal return within three years of filing. But it can collect back taxes up to ten years into the past. Likewise, any audit can come as a nasty surprise to your business, and one that has a fighting chance of setting your business back.

If you receive an audit notification from the IRS, you should prepare thoroughly and appropriately. Firstly, call your tax preparer or CPA. On the other hand, if you handled your taxes yourself, you should reach out to a tax representation team to lend a hand. Unfortunately, many business owners try to handle their tax audits themselves. But they lack the tax knowledge and legal know-how they need to navigate their audit, leaving them with a disappointing result.

After enlisting the help of a tax professional, you should get your business records in order. So pull together all your receipts, books, and business records. To build a good audit defense, you’ll need a comprehensive sense of the money your business has spent and earned. That is to say, you’ll need to have it all in one place.

2. Does the IRS provide any additional guidance about filing business taxes?

Yes! Certainly, the IRS does a great job of supporting small business owners through the tax filing process. We still generally recommend for you to get professional help through a tax preparation company, CPA, or other professional tax preparer. However, you can learn quite a lot on the matter from the IRS itself.

In particular, you should check out the IRS Small Business and Self-Employed Tax Center. At the site, you can find all sorts of information, organized into six major categories. You can learn about starting a business, choosing a business structure, changing your business name, and yes—even filing small business taxes! All in all, the IRS has the basics you need to make informed decisions about your business. Then, you can ensure you’ve thoroughly prepared yourself and your small business for tax season!

Taking on Your Business Tax Returns

Your business tax returns don’t have to be some sort of puzzle. Similarly, they shouldn’t serve as a challenge or an impediment to growing your business. Instead, they should represent a checkpoint and a confirmation as to your hard work and growth.

With an understanding of how to manage your business tax returns, you can refocus yourself on what you do best: Business. Above all, remove the uncertainty from your business’s future and put it in the hands of people who know business tax returns inside and out. The real rewards won’t just be your time, but your sense of wellbeing and confidence. Finally, the risk of tax mistakes will plummet as you set your sights as high as you want.

We’d be happy to come along for the ride.