Business tax prep can seem daunting, especially for small business owners filing for the first time. Use this checklist to ensure that you’re ready to file your federal tax return and know how to maximize your business tax deductions.
If you need more guidance on small business tax preparation, consult with your accountant or tax preparer, or check out the Oregon Small Business Development Center’s resources at the end of this guide.
Know the Types of Taxes Applicable to Your Business
1. Income tax
These are taxes paid on the profits of the business. The Corporate Activity Tax applies to businesses that earn $750,000 or more in annual gross income.
2. Estimated taxes
These are quarterly tax payments that apply to many types of small businesses. If you don’t make estimated tax payments as required, you may be subject to interest on underpayment of estimated tax (UND). For detailed information about paying estimated taxes, see the IRS’s guide here.
3. Self-employment tax
This is Social Security and Medicare on self-employed earnings.
4. Employment taxes
This is Social Security, Medicare, federal and state unemployment taxes, and Workers’ Benefit Fund (Forms 941, 940/ Form OQ, Oregon Schedule B, Form 132, Form QA) for any employees of the business.
5. Business personal property taxes
Filed by each individual, partnership, firm, or corporation, this tax varies by locality. Taxable property includes items such as machinery, equipment, and furniture used in a business.
6. Excise tax
Corporate excise taxes are typically imposed only on a small business set up as a C corporation or an entity that elects to be treated as an S corporation. This is an additional tax charged on goods and services. For entities electing to be taxed as S corporations, a minimum excise tax is typically assessed, and the business owner pays personal income tax on the income that passes through from the business.
□ Choose the Forms You’ll Need
The most common federal tax forms for small businesses:
- Schedule C: For sole proprietors and sole-member LLC owners, this form is attached to your personal income tax return.
- Schedule E: Used by landlords and property owners to report business income and expenses on their properties.
- Schedule F: Used by farmers, ranchers, and others with agricultural businesses.
- 1099-MISC: Used to report other income or rent paid to a landlord.
- 1099-NEC: Used to report payments to individuals and businesses for amounts equal to or more than $600 in the year.
- Form 1120: Used to report income from a C corporation.
- Form 1120S: Used for companies with S corporation status. You should file this form separately from your personal income tax return before the tax deadline.
- Schedule K-1: Prepared for each individual partner in a partnership, multi-member LLC, or LLC that’s elected S corp status, to be included with their personal tax return.
□ Collect the Necessary Financial Documents
Among the most important steps of small business tax prep is collecting pertinent financial information. Having the following documents available (as applicable) will help to make filing your taxes less time-consuming.
- Federal tax ID number, also known as an Employer Identification Number (EIN)
- Business Registry Number for Oregon
- Social Security number
- NAICS codes for your business
- Previous year’s tax return
- Income statement (be sure to provide information either as cash-based or accrual)
- Balance sheet (be sure to provide information either as cash-based or accrual)
- Transactional supporting documents, such as bank and credit card statements, invoices received and paid, and bank deposit slips
- Accounting documents
- Asset purchase information, including the sale of facilities, vehicles, equipment, and stock or inventory
- Sale of assets (provide the date of sale and net book value to determine gain or loss)
- Depreciation schedule of assets
- Mileage log for each vehicle
- A statement on capitalization criteria for assets
- Information on any fringe benefits paid to employees
Employment and vendor tax documentation
- Employee forms: W-9, I-9, W-2
- Subcontractor forms: 1099, 1099-MISC, 1099-NEC
- Payroll documents
Home office documentation
For business owners who use part of their home for business purposes, you may be able to deduct expenses for the business use of your home.
Document the square footage of your home office and the total square footage of your home, as well as how much you paid for mortgage interest or rent, utilities, homeowners or renters insurance, property taxes, repairs, and any separate phone line you maintain. Also, if you use the internet and/or cable, include this with your home office documentation.
□ Understand Tax Deductions and Tax Credits
As a small business owner, you have access to tax deductions and tax credits to reduce how much you owe, but you will need to prove that you qualify for them. Here are some of the deductions that small business owners may qualify for:
- Professional fees
- Operational costs like rent and utilities
- Home office expenses (not deducted directly on the P&L; done on your tax return only)
- Marketing costs to promote your business
- Entertainment and travel expenses
- Healthcare and employee benefit expenses
- Company vehicle insurance
- Asset depreciation
- Loan amortization of points
- Goodwill deduction, if you purchased the business
- Employee salaries and benefits
- Training and education expenses
- Qualified business income deduction, up to 20% reduction in net income
The IRS awards tax credits to businesses that engage in a particular type of business action that benefits the economy or society. Some common small business tax credits:
- Small business health insurance premiums, for businesses with fewer than 25 employees
- Employer credit for paid family and medical leave
- Investment credit for qualifying environmental and energy projects
- Disabled access credit, for expenses to make your business more accessible to those with disabilities
- Work Opportunity Tax Credit, applying to businesses that hire employees from underserved populations (such as veterans, ex-felons, or recipients of family assistance or food stamps)
- Alternative motor vehicle credit, for electric and hybrid vehicle use
□ Get Your 1099s in Order
You may have incoming or outgoing 1099 forms for your business, and it’s a good idea to get these in order in advance.
If your small business works with independent contractors, you must file Form 1099-NEC for each non-employee whom you have paid at least $600 for services performed. If the independent contractor also provided supplies/materials/goods to your business, include those on the 1099-NEC. Be sure to collect a new W-9 from each independent contractor annually, as their business information may have changed.
A service-based small business that has received payments will have incoming 1099s. If you are expecting a Form 1099 and have not received one, be sure to include this in the gross income of your tax return.
If the information on Form 1099 is incorrect, be sure to contact the payer to correct it. If you are unable to do so, attach an explanation to your tax return.
□ Look at I-9s for Expiring Documents
Form I-9 verifies the identity and employment authorization for new employees who have been hired to work in the United States (citizens and non-citizens). Employers are expected to re-verify should an employee’s employment authorization documentation expire.
□ Request New W-4s from Employees
Use Form W-4 to withhold income tax from employees’ pay. Employers should ensure that they have new W-4s for:
- New employees
- Employees who had a change in their personal or financial situation
- Employees who are claiming exemption from withholding
Employers should remind employees to submit a new W-4 form if their withholding allowances have changed or will change next year.
□ Review Balances
When recording loan balances, small business owners should record payments to their loan principal and interest separately. This is because only payments on the loan interest are tax-deductible. Verify that credit card purchases have been entered, and reconcile the credit card at year-end.
Accounts and trade payables need to be verified to ensure that balances that show due for unpaid taxes, vendor invoices, and trade invoices match the details in the accounts payable.
As part of your small business tax preparation, it’s important to review your loan, credit card, and vendor statements with your bookkeeper at the end of the year to ensure that the loan balances on your balance sheet are accurate and match the balances on your statements.
Plan to take this as part of your paperwork for your tax preparer.
□ Review Your Profit and Loss
Your profit and loss (P&L) statement, also called the income statement, summarizes your revenue and business expenses throughout the tax year. Your P&L will include much of the information you’ll need during your business tax prep.
You may be able to lower your total taxes by considering:
- Updating the structure of your business
- Establishing a retirement plan
- Claiming first-year bonus depreciation (a tax break for assets purchased)
- Deferring or accelerating income depending on your tax situation (for those who use pass-through entities)
Be sure to run both the balance sheet and P&L, or income statement as it is known on most software packages, using the same method—cash or accrual.
□ Check In with Your Tax Preparer
A professional can ease the pain of tax season. A tax professional will help ensure that you file your return correctly and that you maximize any deductions or credits available. In many cases, the deductions and recommendations they make can save their fee and more!
If you haven’t yet hired a tax professional, here are some tips to help you find the right one:
- Your tax professional should have more than just a Preparer Tax Identification Number (PTIN), which is required of all paid tax preparers. Oregon requires an exam for an individual to be licensed as either a tax consultant, an enrolled agent, or a tax preparer. These are all better choices to help you file your return.
- Check their qualifications using the IRS Federal Tax Return Preparers with Credentials and Select Qualifications.
- Check their history through the Better Business Bureau.
- Ask to have your return filed online. E-filing is required for those who prepare more than 10 returns. If a tax preparer does not offer e-filing, it may indicate that they do not do a lot of tax prep.
□ Request a Tax-Filing Extension if Necessary
If you don’t think you’ll be able to file your taxes by the deadline, you can request an extension, which will give you until the given deadline to file your return.
Even if you receive an extension, you must pay your taxes by the original deadline to ensure that you don’t incur penalties.
Resources from the Oregon SBDC
The Oregon Small Business Development Center Network is committed to building Oregon’s best businesses. Our 20 Regional Centers assist small businesses throughout Oregon with advising, classes, and access to the resources they need to be successful.
Here are a few of our services that can help small business owners with business tax prep:
Our knowledgeable team of advisers can help you with any challenges you face while preparing for tax season. If you have any questions about small business tax preparation, connect with your local SBDC at OregonSBDC.org.
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