First Year Business Taxes Preparation Guide

As a new business owner, navigating first year business taxes can be overwhelming. You'll need to file a tax return for your business, which is typically due on the 15th day of the 4th month after the end of your tax year.

To determine your tax year, you'll need to decide on a fiscal year that works for your business, which can be different from the calendar year. The IRS recommends choosing a fiscal year that aligns with your business's accounting period.

You'll need to obtain an Employer Identification Number (EIN) from the IRS, which is required for business tax purposes. This unique number will be used to identify your business for tax purposes.

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To prepare for your first year business taxes, start by gathering all your relevant business records. This includes last year's tax returns, your Employer Identification Number, and your Social Security Number. Having these documents on hand will make the process much smoother.

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You'll also want to gather financial records, such as payroll documents, income statements, and bank and credit card statements. This will help you complete your business tax returns accurately.

To stay organized, consider keeping digital records of your expenses and other required paperwork throughout the year. This will save you time and stress when tax time rolls around.

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Gather your business records, including last year's tax returns, Employer Identification Number, SSN, financial statements, and receipts and expenses. This will make it easier to complete your business tax returns.

You'll need to record and categorize every business transaction from your tax filing year, starting from January 1. This can be done using accounting software or an Excel template, and it's essential to record the amount, category, date, and a short description of the transaction.

Reconciling your books with your bank accounts is also crucial to ensure everything is accounted for. This involves cross-referencing transactions in your bank statements with transactions in your company records.

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You'll need to gather your receipts and invoices, including invoices sent to customers, business expenses, records of bad debt write-offs, and vendor accounts. This will help you track how you spent money on your business.

Here are some essential records to keep for your business:

Filing tax forms for your contractors and employees is also a crucial step. If you paid any contractors more than $600 in a year, have them submit a W-9 to you, which you'll use to fill out and submit a Form 1099-NEC to the IRS.

Having a solid emergency fund in place is crucial for any business. It's essential to save about 25-30% of your net business income to cover unexpected expenses.

You'll need this money to make estimated quarterly tax payments, which are due in April, June, September, and January. This means you should always have enough money in the bank to make these payments on time.

For businesses with a consistent stream of income, you can set up automatic bank transfers to regularly pull funds from your primary account into a secondary savings account. This way, you'll never miss a payment.

For businesses with variable income, make transfers manually whenever you receive payment from a client. This will ensure you have enough money set aside for taxes.

Saving money in a separate bank account will help you avoid dipping into this fund for day-to-day business expenses.

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You'll want to make sure you're on top of estimated tax requirements to avoid any penalties. All corporations incorporated, qualified, or doing business in California must make franchise or income estimated tax payments.

This requirement applies to limited liability companies that have elected to be treated as corporations. You'll need to make these payments on time to avoid any issues.

The first estimated tax payment can't be less than the minimum franchise tax, regardless of whether the corporation is active, inactive, or operating at a loss. This is an important consideration when planning your finances.

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If you're a fiscal year corporation, you'll need to adjust your estimated tax payment schedule. The table below shows the number of installments and the percentage of estimated tax due on or before each installment date.

Make sure to review this table carefully to understand your estimated tax payment requirements.

If you're a small business owner, you'll need to adjust your accounting period to ensure you're making timely payments and meeting tax obligations. This might involve making quarterly payments of estimated taxes, as seen in the example for First Year Accounting Period.

For fiscal year corporations, the number of installments and percentage of estimated tax due on or before a certain date vary. For instance, if your fiscal year starts between Jan 1 and Jan 16, you'll have 4 installments due on Apr 15, Jun 15, Sep 15, and Dec 15.

You can refer to the table below for a breakdown of the installments and due dates for different time periods.

Keep in mind that these dates apply to fiscal year corporations, and you should adjust your accounting period accordingly to avoid any penalties or fines.

Your business structure matters when preparing to file business taxes. It determines the correct form you need to complete and submit.

Partnerships are a common business structure, and they file Form 1065, which gives the IRS an overview of the company's profits/losses for the year. Each partner then includes a Schedule K-1 on their personal tax return to report and pay taxes on their share of income.

A corporation, on the other hand, files Form 1120, U.S. Corporation Income Tax Return, and takes the same deductions as a sole proprietorship to figure its taxable income. It can also take special deductions.

Limited liability companies (LLCs) have different tax options, and if you choose to be taxed as a corporation, you'll use Form 1120. Otherwise, single-member LLCs file Schedule C, and multi-member LLCs file Form 1065.

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As a sole proprietor, you're essentially running your own business with no partners, and that's a great thing because it makes filing taxes incredibly simple.

You'll only need to fill out a Schedule C when you file your annual personal tax return, which is Form 1040.

You'll report business profit and loss on this schedule, and that's it.

In fact, sole proprietors need to file two forms to pay federal income tax for the year: Form 1040 and a Schedule C.

Every dollar you earn from your business is taxable, even if you make less than $600.

You'll need to pay around 30% of any income earned after deducting business expenses, and you'll need to estimate these taxes and pay them quarterly.

If you don't, you'll be hit with interest and penalties, so make sure to stay on top of it.

As a sole proprietor, you have a lot of freedom, but you also have a lot of responsibility when it comes to taxes.

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Partnerships file Form 1065, which gives the IRS an overview of the company’s profits/losses for the year.

Each individual partner will include a Schedule K-1 showing their individual share of the profits/losses for the year when filing their personal tax returns.

The partnership distributes Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., to partners.

Partners report business profits and losses to the IRS, and the partners then use Schedule K-1 to fill out parts of their individual tax returns.

The partnership uses Form 1065, U.S. Return of Partnership Income.

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As a Corporation, you'll need to file a separate corporate tax return with Form 1120, in addition to your personal tax return. This is a requirement for C corporations, and can be a bit more complicated.

The tax rate for C corporations is the greater of 8.84 percent of the corporation's net income or $800. This is a key fact to keep in mind when planning your business's finances.

You'll also need to consider the $800 minimum franchise tax, unless you've incorporated or qualified on or after January 1, 2000, in which case you won't be subject to it on your first return. However, you will need to make estimated tax payments equal to 100 percent of your current year tax to avoid a penalty.

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As a corporation, you can take the same deductions as a sole proprietorship to figure your taxable income, and you can also take special deductions. You'll use Form 1120, U.S. Corporation Income Tax Return, to file your corporate tax return.

S corporations, on the other hand, are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This allows S corporations to avoid double taxation on corporate income.

If you're a multi-member LLC, you'll file Form 1065, and each individual member will get a Schedule K-1 with their share of the profits/losses of the business for the year. This is a key difference between LLCs and corporations.

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Corporations generally must make installment payments of estimated tax if they expect their estimated tax income tax less credits to be $500 or more.

For corporations that don't make estimated tax payments when due, they may be subject to an underpayment penalty for the period of underpayment, as stated in code section 6655 and 6621(a)(2).

A corporation that has overpaid its estimated tax can apply for a quick refund if the overpayment is at least 10% of its expected income tax liability and at least $500.

As a small business owner, you're eligible for more tax deductions and credits than you would as a traditional employee. In fact, you can deduct up to $5,000 of startup costs in the year your business opens, with any excess expenses amortized over 15 years.

To keep track of your expenses, maintain a detailed log of your business-related expenses, including office supplies, rent, and home office expenses. For example, if you have a dedicated workspace in your home, you can claim a portion of your rent/mortgage and other home expenses in proportion to the size of the space.

Here are some common tax-deductible expenses to keep in mind:

Automobile expenses can also be a major deduction for your business. Make sure to keep a log of your business-related car expenses, including where and when you traveled, who you met, and whether there was a business purpose for the trip.

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As a small business owner, you're eligible for more tax deductions and credits than you would as a traditional employee with a W2. This means you can save money on your taxes and keep more of your hard-earned cash.

Startup costs can be deducted, up to $5,000 in the year your business opens, with any excess being amortized over 15 years. You can also deduct the cost of items you had to purchase to provide the goods and services you sell.

Office supplies like pens, post-its, and coffee are tax-deductible, but larger items like desks and chairs are not. Instead, they're considered capital goods.

Rent for the space where you conduct your business is also deductible, including office and commercial rent. If you have a dedicated home office space, you can claim a portion of your rent/mortgage and other home expenses.

Many types of business travel expenses are deductible, including air fare, bus passes, hotel expenses, and 50% of the cost of meals while on a business trip.

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As a business owner, keeping track of automobile expenses is crucial for accurate tax returns and potential deductions. Maintaining an auto log is essential to record business-related trips.

The log should include where and when travel occurred, who was seen, and whether there was a business purpose to the trip. This information will be useful for both business and personal deductions.

Some individuals only track business use, but it's wise to keep the log for all auto expenses, as those who itemize their deductions can also deduct transportation as a medical expense or charitable contribution.

You'll need to note when you placed the vehicle in service, and the amount of business, commuting, and personal miles for each vehicle for the year. This will help you accurately report these expenses on your business tax returns.

Here's a breakdown of the key information to include in your auto log:

You'll want to review your non-employee compensation, specifically for independent contractors you paid throughout the year.

If a contractor made $600 or more, you'll need to provide them with a 1099-NEC form, which the federal and state governments will also receive a copy of.

Contractors who are corporations are exempt from receiving this form, but partnerships and limited liability companies (LLCs) with more than one member must receive them.

Have your contractors fill out Form W-9 to give you their social security number or employer identification number, which you'll need to complete the 1099-NEC form.

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All corporations incorporated, qualified, or doing business in California must make franchise or income estimated tax payments, regardless of their activity status.

This requirement applies to limited liability companies that have elected to be treated as corporations, and failure to make timely payments can result in an estimated tax penalty.

The first estimated tax payment cannot be less than the minimum franchise tax, unless the corporation is newly incorporated or qualified.

To make estimated tax payments, corporations must calculate their total tax liability and divide it by the number of estimated tax installments due throughout the year.

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Corporations may revise their estimated tax at any time during the year by subtracting the amount of payments already made from the revised estimated tax, then dividing the difference by the number of remaining estimated tax installments.

Here's a quick summary of the estimated tax payment due dates:

As a self-employed individual, you'll need to pay self-employment taxes, which is comprised of Social Security and Medicare taxes. The total self-employment tax rate is 15.3% of your income.

You can operate your business as a sole proprietorship, limited liability company, partnership, or S corporation, all of which are considered pass-through entities. This means your earnings are reported as part of your personal income.

To calculate self-employment taxes, you'll need to consider the balance due for last year's taxes, as well as the first quarter installment of the next year's taxes. Cash flow must be monitored to ensure that these funds are available.

The IRS extended some tax filing deadlines for 2021, but the extension does not apply to estimated tax payments due April 15. If your business is in an area where FEMA issued a disaster declaration due to winter storms, the filing and payment deadlines for taxes due March 15 and April 15, 2021, are extended to June 15, 2021.

Here are some key dates to keep in mind: