🎉 Tillful is now part of Nav! Compare the best business tax services at Nav
Transcript below.
Overview
If you want to learn an intro to business taxation, you've come to the right presentation. I'm John Dobbs, a CPA, I'm bringing this presentation to you in combination with Tillful and learnaccountingskills.com. Without further ado, let's get into it.
So there's four main areas that we're going to cover today, starting off with picking a business structure. We're going to go into keeping your records some tips for success, filing your taxes. We'll take a look at that. And finally, we'll wrap it up with common tax pitfalls for business owners. And then I'm going to hit some roundup questions that are common questions for small business owners as well (thanks for sending these in advance!).
Topics we’re going to cover:
- Picking your business structure
- Bookkeeping tips for success
- How taxes work for each business structure
- Common tax pitfalls (and how to avoid them)
- Questions from Tillful users
Picking your business structure
So in our first section, picking a business structure, there's really three main types of business structures that I want to cover today for small businesses. That's going to be sole proprietorships, partnerships and limited liability companies. We'll get started with sole proprietorships.
Sole proprietorship
Sole proprietorships are the most basic form of a business structure. I want you to think of going to a market on the weekend. Maybe you buy some juice like the picture here. If you're buying it from an individual, it's likely that they're organized as a sole proprietorship. They're probably a single owner that still needs a business license. They don't require tax registration as a sole proprietorship. But then the taxes are just passed through, and it's a single level of taxation for this business owner. So what that means is it's going to just be showing up on a schedule C on your 1040. We're going to touch on this a little bit more here in a few minutes. But I just want you to keep in mind the main point of single taxation as a sole proprietorship.
Now, there is a downfall, and that's the unlimited liability that sole proprietorships have. So say you sold somebody some bad juice, they come back and sue. There's no limited liability protection.
Limited liability company (LLC)
Now let's look at another business structure which does have a little bit of protection. Limited Liability Companies, you may have heard of them. You may be familiar with them. Now, they can be single or multiple members. What that means is it can just be yourself organizing an LLC to get that bit of protection. Or, maybe you have a bunch of investors and maybe you have a real estate firm that invests in single family housing and rents it out. So an LLC is going to need to register with the state for the status.
It does have a lot of flexibility when it comes to filing your taxes and how many members you can have in your LLC. So it's a flexible number of members with no maximum and the tax filing status. We're going to get to that to see a couple of different ways that you can file your taxes in the LLC. So the big takeaways on this one, are you kind of step up from the sole proprietorship you get a little bit of limited liability. And that means there's a veil between your personal assets and the business assets. So you'll see a lot of business owners go with this business structure to reduce the liability of their personal assets.
Partnerships
Okay, for our final business structure, we're going to touch on the partnerships. You might think of two individuals usually as a partnership and that's totally correct. That being said, you can have a bunch of partners (more than two) in a partnership. So that might look like a law firm or an accounting firm where they have a ton of partners, and they're starting a business. The general partner is in the business, and there are usually a few general partners. The limited partners are going to have limited liability, while the general partners are going to have unlimited liability in a standard partnership.
You don't have to register for the tax status of a partnership. But I usually tell people that you want to have a written partnership agreement that definitely helps when it comes to income expenses and partnership levels. And then the key thing to note here is this is also single taxation. So it's taxed at the partner level, you're gonna have to file a return at the partnership level. But the pro rata share relief follows down to the partner. And you'll see that in a couple more minutes here when we get into the tax filings of partnerships.
Bookkeeping tips for success
So next, we're gonna get into our second section, which is keeping your records. There are three things I want to touch on today, and it's bookkeeping tips for success. I think that's going to help a lot of people out. Another question I usually get from small business owners that are kind of just looking to start up a business they want to save some money is can I use Excel for my books? So we'll touch on that. And then also, what software do I need for record keeping? So we'll take a look at a few of those as well.
Can you use Excel for your books?
So can you use Excel for your books? I hear it so often. And what I usually tell people is Excel is a spreadsheet software. It is not a bookkeeping or accounting software. It’s great for keeping records in the form of a spreadsheet, but for tracking income and expenses, it's just not the best solution out there. Also, it doesn't have the best cloud capabilities. While you can put it up on a Google Drive or using Google Sheets, it's just not as convenient as what we're going to look at at some of these softwares that are on the cloud and specifically for accounting. So while I say to a lot of sole proprietors, they can use it when they're first starting out, and if they don't have a lot of activity, it's not something I would recommend to individuals to use over the long term, just for the purposes of bookkeeping, and also financial reporting, and their tax return and keeping all that in track. There's definitely better solutions out there.
John’s recommendation for bookkeeping software
So let's take a look at a few of those better solutions. You might be familiar with these icons. I certainly am. I deal with them a lot. But QuickBooks and FreshBooks are two of the big bookkeeping accounting softwares for small businesses. That said, QuickBooks, it's online, so is FreshBooks, they're both easy to use, easy to sign up for. They're pretty inexpensive. So you're stepping up from excel at this point. And the reason being, is you have a lot of bookkeepers out there who use QuickBooks and FreshBooks. And you'll be able to either do the files yourself for the bookkeeping, if you just want to keep that in house, or if you want to outsource that, you can also do that as well. And you'll be able to touch base with your accountant or bookkeeper just over the internet for your small business.
The beauty of these, unlike Excel, is they can import transactions from bank feeds as well. So that's something you won't see in Excel. It's a lot more robust if you need to account for inventory or you have an online e-commerce business, or maybe just a lot of suppliers and you need to invoice them. That's something that you know QuickBooks here is really good at doing. Just between these two, I would say FreshBooks is a little easier if you're going to keep it in house and do your own bookkeeping, but then QuickBooks is a bit more robust. They have a lot more plugins. And when it comes to tax time, you can kick that from QuickBooks over to TurboTax which can be super helpful. Also, like I said, there's a lot of accountants out there who are just super familiar with QuickBooks. So there's a large knowledge base as well.
Tips for keeping bookkeeping in-house
Now for some bookkeeping tips for success, you might want to keep that bookkeeping in house. If so, here's some things I think you should do. So quickly capturing transactions. This is especially important if you're doing a lot of manual transactions, and just stuff that's not linked into your QuickBooks. So, if you're spending money in cash for your business at an office supply store, you're gonna want to keep that receipt, get it scanned into your bookkeeping software quickly so you don't misplace it, you don't miss account for it, it's not lost.
The next one is splitting business and personal expenses, something I see too often with small business owners. It's just them lumping together business and personal expenses. You can't do that for a tax return. You’ve got to keep those personal expenses out of your business. So when it comes to your business expenses, I generally recommend linking those out there as much as possible as flowing into the online software as possible. And then when it comes to, you know, you have a receipt that has business and personal expenses, highlighting that letting your bookkeeper know, or making sure you mark those as personal in QuickBooks, so it's not accounting for those expenses.
Outsourcing your bookkeeping
Lastly, is outsourcing when necessary. A lot of small business owners (I feel like I'm preaching to the choir here), but they wear a lot of hats. And so while they're busy with sales and inventory and new products, maybe they just don't want to do bookkeeping and maybe they shouldn't. Maybe they should focus more time on sales, and not a lot of time on bookkeeping. So if that's the case, and that sounds like you as a small business owner or someone who's getting into a small business, then I would say look into outsourcing. You can have somebody do your books for you. Get all your transactions linked in. They can send you reports at the end of every quarter, a month, at year end, whatever you decide on. And that's one thing off your plate so it can definitely drive successful bookkeeping, if you outsource when you need it.
Taxes for each business structure
Okay, so we're getting into the taxes themselves. Again, you see our big three business structures here, sole proprietorships and partnerships and limited liability companies.
Sole proprietorship
So sole proprietor tax returns are quite unique, as I said before, it's just one level of taxation. So all that income and expenses from your business is going to be captured on Schedule C of a 1040. I think this is really important for small business owners to know, because I tell a lot of small business owners just starting out, they can file their own taxes using online software, so think of it like your TurboTax, but there's other things to keep in mind as well, which may make you still want to hire a CPA or work with an accountant. Those are your self employment taxes, Social Security and Medicare that you need to account for throughout the year. Also your federal and state taxes. So you need to make sure you're making those estimated payments throughout the year on your income. And then also if you start hiring employees, there's employment taxes to be aware of.
All that stuff can get captured here as well on your schedule C. And then this will be flowing into your 1040 because it's just a schedule on the form 1040 return, so it's not a separate return per se for your sole proprietorship business. It's quite a simple return for small businesses, single owners. And I just think that, you know, more people can file this themselves, and probably do out there, but when we get into these next ones, they do get a little bit more complex.
LLC, C-Corp, and S-Corp
So limited liability companies, these ones we saw how flexible they were when setting them up as a business structure. You can have your single or multiple member LLCs. Something interesting though is the IRS actually doesn't recognize an LLC as a taxable entity. What does this mean? So if you're a single member LLC, you're going to file the Schedule C of the 1040 and it will be just like a sole proprietorship. So, you're getting that limited liability protection on the business structure side, but on a tax side, it follows that schedule C. If you have multiple members in there, typically it is going to be filed as a partnership using the 1065 form and we'll speak more than just a minute. You can also make an election to file as a corporation. So, you would use your form 1120. Some things to keep in mind there as a corporation is, as we've said before, with a lot of these, it's a single level of taxation.
Now if you look at a C Corp, it's subject to double taxation. If you look at an S-Corp though, it's single taxation. So you should really consult a CPA if you're starting up a business looking to pick your business structure and how that's going to affect your taxes as well. Should use a CPA on this one, I would say most likely if you're going to have multiple numbers, and then you're gonna need to file a 1065. So we'll look at that here in just a minute. It is a bit more complex. Corporation filings are definitely a bit more complex. If you're just filing as a single member LLC, you can probably do it by yourself, but it doesn't hurt to get a CPA as well. Plenty of people do it's a great way to go about your taxes.
Partnerships
So partnerships. I mentioned they're a little bit trickier than just a sole proprietor filing. There's really two pieces to them. They're not taxed at the partnership level, but the form 1065 partnership return needs to be completed by March 15th. The reason being is, all the partners need to receive their Schedule K-1s which has a pro rata share in the partnership. You may have received one of these for your tax return before which gets captured on your form 1040. Just like a sole proprietorship, quarterly tax payments do need to be filed for your estimated tax payments. So just keep that in mind. You might want to work with a CPA on that front as well. The beauty of partnerships, I think we touched on it before but single taxation it's just going to be taxed at that partner level. So that 1065 return which puts out the K-1s is basically just to distribute the pro rata share of the partnership return itself.
But at the end of the day, you're gonna get the K-1, it'll be single taxation at the partnership level, which is one of the benefits. Now while this form may look a little bit different, the essence of it at the end of the day is capturing your income expenses, deductions, etc. Just like LLC and sole proprietorships.
Common tax pitfalls (and how to avoid them)
Alright, we're getting on to the fourth section here, which is going to be common tax pitfalls. I have three I want to go over.
Not meeting your filing deadlines
This one sounds crazy to a lot of people. But surprisingly, more tax filing deadlines are missed than you'd expect a lot of that to improper planning upfront. Maybe they haven't contacted a CPA when they needed one early enough in the year, but typically I'm saying like, you know, over the summer months or in the fall, reaching out to a CPA and saying hey, I need to get these taxes filed for my business. What do I need? What should I do to get in line? And also, just staying on top of those tax filing deadlines as a business owner so like we said, a partnership for the 1065 the return itself will need to be done by March 15 unless extended.
Missing deductions due to bad record keeping
So we kind of touched on separating out your business and personal expenses. And this one is a little simpler because maybe something you've written it off as personal but it is a business expense. So you just want to make sure you have good record keeping. You're using the online software, preferably for your small business for bookkeeping, you're not using Excel if possible, and you have the money to use an online software. You're getting everything recorded timely, and that's going to help when it comes around to tax time for the deductions of your return and making sure you have good record keeping that your CPA or yourself is going to look at.
Not keeping copies of your returns
You should keep copies of each year of your tax returns. That way you go to apply for a business loan, or you're switching preparers. There's multiple reasons, but keeping copies of your tax returns is essential. It doesn't matter if you're an individual or sole proprietor or a small business. Each of those should keep copies of their tax return. A lot of the time, individuals file it away and they don't really know where they're putting those copies of their returns, but I always tell everyone, make sure you store them in a safe place and probably put them on a digital platform as well. So you know, your Google Drive is a great place to keep some of your older tax returns.
Questions from Tillful users
So we're just going to round these up. We've kind of captured them here. I want to do a walkthrough of these. I think they're going to help a lot of small business owners out there answering these questions. And hopefully it's something they can come back to in the future if they need to take a look at these.
Do I need to file taxes if I haven't made any money in the business yet?
I hear this one often. I usually recommend people: you should be filing taxes, even if you haven't made any money yet in the business. The reason why is you know there still can be deductions that you want to take on that schedule C or on your tax return. Also, it's quite possible you carry that loss forward to another year and apply it against income that comes in against the business. Plus, you want to show how long your business has been in operation. And we'll touch on that here in a minute. But like I said, keeping copies of the old tax returns. So if you start filing now, then in three years, you're gonna have three years of history. So even if you're not making money now, make sure you capture your business in that return file.
How can you tell if your business is a hobby?
So hobbies versus businesses is a tricky one. When it comes to a business, there's quite a few tests that need to be met for business. Are you spending a lot of time on the business, or are you trying to make a primary income from it? Versus a hobby you might not be spending a lot of time on. One I heard the other day is you know some YouTubers who wanted to start up a sailboat channel on YouTube where they would go out on the weekends, and they were asking if that would be a business. Typically speaking, something like in that example would be a hobby unless they're making quite a bit of income from it or putting quite a bit of effort into it. So I would use those as the initial test but always speak to a qualified professional on your specific circumstance.
So what taxes are employers subject to?
So they're going to be subject to their federal and state unemployment withholdings, their state taxes for income as well, Social Security and Medicare and also employment tax as an employer who's hiring employees. This goes really into our next question, which is what taxes are small businesses subject to? It's quite similar. You're really hitting a lot of the same taxes. But just some takeaways is make sure you're making those estimated tax payments. Also if you're a sole proprietor, and you're paying all your Social Security and Medicare taxes, half of that is deductible on your return
What expenses qualify for write off and how do you write them off?
So these are really going to be the business expenses that your business is capturing. So maybe you know you're driving to customers houses and there's mileage, you can add a vehicle right off. You can have stuff for your business office expenses, your home office, there's really a lot, and you just need to think of expenses as a whole for a write off. Now, capturing them for a write off is, you're going to want to go back to that really good bookkeeping. Establishing that good bookkeeping is going to help you at tax time. So if you have captured all those expenses over the year, in your bookkeeping software, your CPA or yourself or the tax filing software, should be able to get those keyed in and put into the tax return. The boxes are labeled pretty clearly. So if you take a Schedule C, there's specific sections for you know, your home office deduction, etc. There's specific sections for all your expenses labeled out. So just keep that in mind. Good bookkeeping will really help you during tax season. A lot of the business expenses will qualify for write off.
Should you self-file or hire an accountant?
So like I said, it depends on your return situation. A lot of sole proprietors out there can probably file that return themselves. But if your business is getting more complex, if you have a lot of rental units, if your business is complex, you know, maybe you're an LLC with multiple members, or partnership with a lot of partners, then go out there speak to a CPA. I'd recommend getting an accountant to help you file. They’re really knowledgeable in what they do and a good accountant’s going to help your business at the end of the day.
How do taxes affect business funding eligibility?
This is a good one. You know, you're going out there to get some business funding for your new business. You're gonna want a history of tax returns, that way they can see you've been operating if possible. They're gonna want to look at your cash flow in your tax return and see how much you're making. Using that, they might ask you, you know, debt questions about your business, etc. But the big ones are having that history, seeing your income, seeing your expenses, all of that can affect business funding eligibility quite a bit. So it definitely helps to have those tax returns filed, and know where they are so you can produce them when needed.
What are some popular tax write offs?
Somebody like myself, you know, I've said it is the home office deduction. If your business is using vehicles, etc, there's deductions for that, for your mileage. Another one is travel. So, a lot of people think, you know, conferences, maybe you're going to a client site, etc, those can all be things considered as tax write-offs. Nothing too fancy there. But, definitely ones I like.
About John, and how to get in touch
So, just a little bit about myself. We're wrapping up here. Thanks for joining me. I'm an ex Big 4 Manager. You can get in touch with me. I run the site over here: learnaccountingskills.com. You have my email (below). I've even put in a couple, helpful links if you want to continue your learning. If not, there's one takeaway today: if you don't think you can do your taxes yourself, get in touch with the qualified individual, and make sure you meet that tax filing deadline on time.
Thanks for joining, and I'll see you again.
Further resources:
Bookkeeper vs Accountant vs CPA: What’s the Difference?
Can I Do My Own Accounting for My Small Business?
The Most Important Financial Reports for Small Businesses
Get in touch with John
John Dabbs, CPA, CAMS
