(Note: The information below should not be taken as official tax advice. You should contact your tax professional before making any financial or tax decisions.)
As a small business owner, it is important to pay all business-related federal, state and local taxes on time to avoid additional fees or harsh penalties. In Iowa in particular, all businesses must pay taxes to stay compliant and in good legal standing.
Owning and operating a small business can be stressful when it comes to taxes. There are different ways you can prepare and file your taxes, depending on whether you run the business as a sole proprietorship or use a legal entity, such as an LLC or corporation. The type of business entity will determine the set of tax forms and information needed to help you prepare your taxes.
To help mitigate the stress associated with tax time, it is important to be prepared, start early and consult a professional CPA before it is too late.
Keep reading to learn more about the top 5 tax preparation tips for small businesses in Cedar Rapids, Iowa.
1. Gather all your records
Preparing your taxes can seem overwhelming. One of the main ways to reduce stress when tax time rolls around is to keep good records and good books throughout the year.
In preparation for filing your taxes, you will need to reference your records to gather the information that pertains to your business earnings and expenses. This process is a lot easier if your business utilizes spreadsheets or computer programs, such as QuickBooks or Quicken, to organize and keep track of all transactions throughout the year. Otherwise, you will need to piece together all that information retroactively, which is the last thing you want to have to do when trying to prepare your tax return.
2. Find the right form
All businesses are required to report their business earnings to the IRS and pay tax on them. However, different types of business entities are required to submit different forms when reporting business income and expenses. The type of forms you need to report your earnings will depend on how you operate your business.
If your business is registered as a sole proprietorship, you can report all of your business income and expenses on a Schedule C attachment to your personal income tax return. If you run your business as an LLC and you are the sole owner, the IRS considers you to be a sole proprietorship that also uses the Schedule C attachment. However, multi-member LLCs are considered partnerships and typically file Form 1065.
If your business is organized as a corporation or you elect to treat your LLC as one, then you need to prepare a separate corporate tax return using Form 1120 for C-Corporations or Form 1120S for S-Corporations.
Always refer to the IRS website to ensure that you are submitting the correct form for your small business.
3. Ensure your expenses are separated
As a general rule of thumb, regardless of what your business is classified as, mixing finances and expenses between business and personal accounts can get very complicated. All business and personal expenses should be separated from the time you start your business. This will save you a lot of time, stress and untangling in the future.
Mixing personal and business expenses opens the door for the IRS to investigate both of your accounts. For example, if the IRS audits your company and finds personal expenses, regardless of whether you reported business expenses correctly, the IRS could start looking into your personal accounts.
4. Prepare and file your Iowa business taxes
All businesses in Iowa must file an annual tax return to the Department of Revenue, even if they had $0 in sales, in addition to federal taxes. The tax rate varies depending on the type of business but for small businesses, it typically ranges from 0.33% to 17% depending on the type of business and activities it engages in.
Filing your income taxes to the Iowa Department of Revenue is easy, it can be done online using eFile, delivered in person or sent by mail. Please contact your tax preparer Cedar Rapids if you have any questions about this filing process or need assistance.
5. Work with an accountant year-round
A lot of small business owners make the mistake of waiting until tax time to start working with an accountant. Working with a CPA throughout the year will make tax preparation a lot easier and less stressful. If you continuously work with an accountant, they will help you track income and spending and monitor your cash flow.
CPA’s are trained tax experts who can help you not only navigate the entire process but help to maximize your return to save you money.
Preparing taxes as a small business is not an easy task. Follow our top 5 tips for preparing your taxes and feel free to reach out to our team of tax experts with any additional questions!