Everything You Need to Know to Maximize Business Tax Deductions
Business tax preparation can seem daunting, especially for small-business owners filing for the first time. To ensure that you’re ready when tax time comes, start early! Follow this checklist to prepare for your small-business taxes and know how to maximize your business tax deductions.
If you need further guidance on current and future business tax preparation, check out the Oregon Small Business Development Center’s resources at the end of this guide.
Business Tax Preparation Checklist
Know the types of taxes applicable to your business.
Choose the forms you’ll need.
Collect the necessary financial documents.
Understand tax deductions and tax credits.
Get your 1099s in order by collecting W-9s now.
Look at I-9s for expiring documents and request new ones at least two months in advance—plus, be sure to sign the renewal section.
Request new W-4s (state and federal) from employees.
Review your loan, credit card, and accounts payable balances, and check that they match the balance sheet.
Review your profit and loss and consider tax-saving strategies.
Check in with your tax preparer, or select a tax preparer accountant now.
Request a tax-filing extension well before your filing deadline.
Know the Types of Taxes Applicable to Your Business
There are various types of taxes that Oregon small-business owners are required to pay to the IRS and state tax authorities. The six main types of taxes your business may be responsible for include:
- Income tax: Taxes paid on the profits of the business (individual/self-employment and corporate). The Corporate Activity Tax (CAT) applies to businesses that earn $750,000 in gross income or more in a year.
- Estimated taxes: Quarterly tax payments, if you are a sole proprietor/sole member limited liability company (LLC) filing a Schedule C, Schedule E, Schedule F, or Form 1065 as a partnership/ multi-member LLC partnership return for your business. If you are a Sub S, be sure to consult your tax professional for your specific election and filing requirements.
- Self-employment tax: Social Security and Medicare for self-employed earnings.
- Employment taxes: Social Security, Medicare, federal and state unemployment taxes, and Workers’ Benefit Fund (Forms 941, 940/ Form OQ, Oregon Schedule B, Form 132, Form QA).
- Business personal property taxes: Filed by each individual, partnership, firm, or corporation, this tax varies based on your locality. Taxable property includes items such as machinery, equipment, and furniture used previously or presently in a business.
- Excise tax: Depending on your business structure, you may be assessed an excise tax. Corporate excise taxes are typically imposed only on a small business set up as a C corporation or LLC that elects to be treated as a corporation; this is an additional tax charged on goods and services. For S corporations and LLCs, a minimum excise tax is typically assessed, and the business owner pays personal income tax on the income that passes through from the business. Also, if employees work in the TriMet or Lane Transit Districts, an excise tax will be due.
Be sure to consult with your tax preparer to ensure that you meet all your tax obligations.
Choose the Forms You’ll Need
Once you understand the types of business taxes that are assessed, it’s time to choose the forms you’ll need.
The most common tax forms small businesses need include:
- 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 (services and goods).
- Form 1120: Used to report income from a C corporation.
- Form 1120S: Used for companies with S corporation status, this form should be filed separately from your personal income tax return.
- Schedule K-1: Prepared for each individual partner in a partnership, to be included with their personal tax return.
If you are unsure which tax forms you need, be sure to consult with your tax preparer.
Collect the Necessary Financial Documents
Among the most important steps of business tax preparation is collecting pertinent financial information for your taxes. Having the following essential documents readily available will help to make filing your taxes less time-consuming:
- Federal tax ID number, also known as an EIN
- Business Registry Number for Oregon
- Social Security number
- NAICS Code 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, expenses may be deductible 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 to the home; and any separate phone line you maintain. Also, if you use the internet and/or cable, such as for watching YouTube videos or to communicate with customers, include this with your home office documentation.
Understand Tax Deductions and Tax Credits
As a small-business owner, you have access to advantageous tax deductions and tax credits to reduce how much you owe, but you will need to prove that you qualify for them.
A tax deduction reduces a business’s taxable income, while a tax credit reduces the business’s tax bill.
Some of the deductions that small-business owners may qualify for include:
- Professional fees, such as attorneys, accountants, and bookkeepers
- Operational costs, such as 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 (QBI) deduction, up to 20% reduction in net income
Tax credits are awarded to businesses that engage in a particular type of business action that is helpful to the economy or society. Some common small-business tax credits include:
- 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, among others
- Alternative motor vehicle credit, for electric and hybrid vehicles used for business purposes
- Information on all grants, PPPs and other incentives provided during COVID
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, those are included on the 1099-NEC. In cases where the amount you paid is below $600, you will not need to file a form. Be sure to collect a new W-9 from each independent contractor annually, as their business information may have changed.
If you are a service-based small business that has received payments, you 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 the Form 1099 is incorrect, be sure to contact the payer to get it corrected, and 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 reverify should an employee’s employment authorization documentation expire.
If you have any questions about completing and managing Form I-9, be sure to speak with your tax preparer and/or payroll provider.
Request New W-4s from Employees
Form W-4 is used 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 are encouraged to remind employees to submit a new W-4 form if their withholding allowances have changed or will change next year.
Review Balances, and Check That They Match the Balance Sheet
When recording loan balances, small-business owners should record payments to their loan principal and interest separately, as 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 detail in the accounts payable.
As part of your 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, and Consider Tax-Saving Strategies
Your profit and loss (P&L) statement, also called the income statement, summarizes your revenue and expenses throughout the year. Your P&L will include much of the information you’ll need during your business tax preparation.
As you review your P&L statement, you may be able to lower your total taxes by considering strategies such as:
- Updating the corporate 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.
Remember to consult your tax preparer to be proactive with your tax planning and see if you qualify for potential savings.
Check In with Your Tax Preparer
In addition to providing you with information and advice on key tax decisions, having a professional prepare your tax forms can ease the pain of tax season, and in many cases the deductions and recommendations they make can save their fee and more!
A tax professional will help ensure that your business taxes are filed correctly and that you are maximizing any deductions or credits available to your small business.
To avoid needing multiple appointments with your tax preparer, ask for a client organizer or guidance on what to prepare in advance of your appointment.
If you haven’t yet hired a tax professional, here are some tips to help you find the right tax preparer:
- Consider requiring a CPA, law license, or Enrolled Agent designation. It is relatively easy to obtain a Preparer Tax Identification Number (PTIN), which is required of all paid tax preparers, so credentials that require varying amounts of study and ongoing education can help in finding the right person to help with your taxes.
- Check their qualifications using the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
- Check their history through the Better Business Bureau.
- Ask to e-file. E-filing is required for those who prepare more than 10 returns. If your tax preparer does not offer e-filing, it may indicate that they do not do a lot of tax preparation.
Request a Tax-Filing Extension if Necessary
If you’ve already begun to think about business tax preparation, you’re likely ahead of the game, but there are times when an extension may be necessary.
If you don’t think you’ll be able to file your taxes by the deadline, it’s possible to request an extension from the IRS, which will give you until the fall to file your tax return.
It’s important to note that, even if the filing deadline is extended, you must pay your taxes by the original deadline to ensure that you don’t get penalized.
Business Tax Preparation at the Oregon SBDC
The Oregon Small Business Development Center Network is committed to building Oregon’s best businesses. Our 19 centers assist small businesses throughout Oregon with advising, classes, and access to the resources they need to be successful, including business tax preparation. Each center is backed by our statewide network of support, helping small businesses access the right assistance wherever they are in Oregon.
A few of our services that help small-business owners with business tax preparation include:
Oregon’s small businesses are as unique as our state, and our knowledgeable team of advisers can help you with any challenges you face while preparing for tax season. If you have any questions about preparing for your business taxes, connect with your local SBDC at OregonSBDC.org.