Staying on top of taxes is a year-round job for American business owners. As the 2024 tax season approaches, entrepreneurs and small business owners must understand the recent changes to the tax code, organize financial records, and leverage experts to ensure accurate, timely, and compliant returns. Preparing well before the deadlines can help identify eligible credits and deductions, minimize tax liability, and avoid penalties. Here's our 2024 business tax filing guide that breaks down key steps and best practices to simplify your business tax filing: 

Getting Clear on Your Business Structure

The first step to business tax preparation is knowing your federal business tax classification. It includes how your business is structured legally and for IRS tax purposes. Evaluating entity types including evolutions to your business model is important for minimizing taxes and burdens. The most common types include:

Sole Proprietorships- A sole proprietorship is owned and operated by a single person with no legal separation between the business and the owner. The proprietor has unlimited personal liability for all debts and obligations. For tax purposes, a sole proprietor reports all income and losses from the business on Schedule C of their personal 1040 tax return and pays taxes at personal income tax rates.

Partnerships - A partnership exists when two or more co-owners operate a trade or business together. These include general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs). Partnerships are flow-through tax entities where the partnership itself does not pay income taxes. Its profits and losses "pass-through" proportionally to the owners (partners), who then report that share on their tax returns.

C Corporations- C corporations are separate legal entities from their owners (shareholders). As such, they pay income taxes on profits at the corporate level. Owners then pay taxes again on dividends received. This “double taxation” causes higher tax liability overall.

S Corporations- An S corporation is a federal tax status opted for by incorporated entities using IRS Form 2553. It allows profits, losses, deductions, and other tax items to pass through the corporation directly to owners’ returns, avoiding double taxation.  Owners pay taxes on their shares based on their ownership stake. This makes S corporations popular for small businesses, however, S corporations do come with limitations like a 100-shareholder cap.

Limited Liability Companies- LLCs provide personal liability protection for owners while allowing pass-through taxation for flexibility not seen in traditional corporations.  Depending on the number of members and other factors, an LLC will file as a partnership (Form 1065) or corporation (Form 1120) as appropriate. However, single-member LLCs can report as sole proprietors on Schedule C to save compliance work.

Understanding Common Business Tax Forms

Here are the four main tax returns filed by most non-exempt organizations:

Form 1120 for C Corporations - This long-form return outlines income, deductions, gains, losses, credits and final income tax owed. As a separate legal entity, C corps must report extensive financial details across up to 44 pages because they face double taxation - at both the corporate and shareholder dividend levels.

Form 1065 for Partnerships - Required for entities with multiple co-owners collaborating together as a single business. Form 1065 summarizes total partnership income, deductions, and partner ownership ratios. It then passes the individual earnings or losses on Schedule K-1s for partners to report on their personal tax returns to avoid double taxation.

Form 1040 Schedule C for Sole Proprietors - This simple single-page supplemental schedule is filed along regular individual Form 1040 tax returns by self-employed freelancers, independent contractors and microbusiness owners. It reports basic sole proprietorship profit/loss that gets included as part of total taxable personal income. 

Form 1120S for S Corporations - This retains limited liability protection and other centralized benefits of C corps and taxes the entity like partnerships to reduce burden. Owners pay taxes on distributed percentages of corporate income at their individual rates, while the corporation handles payroll, compliance, and operational needs centrally.

Organizing Your Financial Records

Maintaining accurate and organized financial records is vital for streamlining tax preparation and minimizing the risk of tax penalties. They serve as clear proofs during IRS audits and uncover deduction opportunities. Here are the key documents you must maintain either physically or digitally through accounting software and bookkeeping systems for accurate business tax return process :

Income Statements - Monthly and annual income statements outlining all revenues earned and business expenses. The profit and loss reporting is imperative for accurately calculating tax liability.

Balance Sheets - Record of business assets, liabilities, equity on the last day of your tax year which informs asset-sale gains/losses.

Business Invoices - All invoices issued to customers alongside vendor bills/contractor invoices. They must be kept for 3 years to prove deduction eligibility if audited.  

Payroll Tax Records - Form W-2 and 1099 forms issued that detail annual compensation. Collect all payroll processor records of payroll tax liabilities paid on employee wages towards Social Security, Medicare, and unemployment insurance.

Compiling Your Tax Return Information   

Gathering comprehensive information for filing is a crucial step in ensuring accurate and compliant tax submission. It involves reviewing critical information including: 

Income Sources

Sales and Revenue-Identifying all sources of income is fundamental to the tax-filing process. For businesses, sales and revenue represent primary income streams. Thoroughly review financial records, sales reports, and transaction documents to compile a comprehensive list of all income generated during the tax year.

Interest and Dividends- Beyond operational revenue, it's essential to account for any interest earned or dividends received. Gather statements from financial institutions, investment portfolios, and any other relevant documentation to provide an accurate picture of non-operating income.

Business Expenses

Operating Expenses- Documenting operating expenses is integral to determining the net income of a business. This includes costs such as rent, utilities, insurance, and maintenance. Collect invoices, receipts, and financial statements to account for all operational expenditures throughout the fiscal year.

Deductible Business Expenses- Identify and compile records of deductible expenses, such as business-related travel, meals, and entertainment. These expenses can significantly impact the overall tax liability. Ensuring the availability of accurate documentation is vital to substantiate these deductions during the filing process.

Employee-Related Information

W-2s and 1099s- Collect W-2 forms for employees and 1099 forms for contractors. These documents outline earnings, withholdings, and other pertinent financial details. Ensuring the accuracy of these forms is crucial for both employer and employee compliance with tax regulations.

Payroll Tax Information-Review and compile payroll tax information, including records of withheld taxes and employer contributions. Ensuring compliance with payroll tax regulations is vital, and accurate documentation is necessary for filing payroll tax returns.

Leveraging Deductions & Credits Available for Businesses 

You can take advantage of several deductions to reduce your taxable income. The key business deductions include:

Equipment Purchases- Under Section 179 expensing rules, businesses can fully deduct up to $1.16 million for new or used equipment purchases in the first year. This allows writing off the entire equipment cost upfront rather than depreciating over time. Section 179 covers computers, software, vehicles, machinery, furniture, and more utilities mentioned on the IRS website.

Startup Expenses- Rather than deducting all initial startup costs in year one, small businesses can amortize these expenses over 15 years under IRC 195. Up to $5,000 in startup costs are deductible in the first year. The $5,000 deduction limit then phases out dollar-for-dollar for excess expenses up to a total $50,000 in costs. Expenses include market research, insurance, rent, advertising, and training.

Research & Development Costs- Businesses can fully deduct R&D expenditures in the year incurred under IRC 174. This includes wages for researchers, supplies, testing, and payments to others for R&D work. Costs are deducted instead of capitalizing them over time. Software development costs may also qualify for this deduction.

Employee Benefits- Employers can deduct costs of providing various fringe benefits to employees. This includes health insurance premiums, retirement contributions, tuition reimbursement, adoption assistance, transit passes, and more. However, limits and non-discrimination rules apply. Refer to IRS guidance for details.

Qualified Business Income Deduction- Eligible taxpayers can deduct up to 20% of qualified business income from pass-through entities. This includes S-corps, LLCs, partnerships, and sole proprietorships. The deduction aims to put pass-throughs on par with C-corps getting lower corporate tax rates. Limitations apply based on W-2 wages paid and capital investment for higher-income filers.

Read more about Qualified Business Income Deduction here. 

The tax code also provides credits to incentivize beneficial business activities. The key business credits include:

Research Credit- It enables claiming a tax credit for qualified research spending leading to new/improved products, processes, technologies, and software. Eligible activities include designing prototypes, conducting experimental tests, developing new software, and paying for research supplies.

Work Opportunity Tax Credit- It helps companies hire employees from target groups like veterans, ex-felons, public assistance recipients, long-term unemployed, and residents of distressed areas. Credits per employee are based on the target group and hours worked in the first year.

Disabled Access Credit - This credit helps cover a percentage of expenses to improve accessibility for disabled persons. Qualified expenses include interpreters, adaptive equipment, accessible parking/bathrooms, ramps, walkways, and more.

Employer Credit for Paid Family Leave- It provides up to 25% tax credit on wages paid to employees on FMLA leave for birth/adoption of a child or serious family health issue. It encourages employers to offer paid family leave to retain talent.

Check our latest blog Year-end Tax Planning Strategies Guide to explore key deductions and credits to maximize your tax savings. 

Leveraging Electronic Filing and Payment

IRS e-file allows all major federal tax forms and schedules to be submitted electronically. It streamlines submitting required tax forms and payments for hassle-free filings. Most states also offer e-file for state tax returns. The IRS provides several electronic payment options including direct debit, credit/debit card, and the Electronic Federal Tax Payment System. Using electronic systems makes filing and payment easier and ensures timeliness.

Understanding Business Tax Deadlines, Extensions, and Penalties

Here are the key deadlines for filing business taxes:

• For pass-through entities like partnerships and S-corporations on a calendar year, 2023 tax returns are due by March 15, 2024.
• C-corporations on a calendar year must file 2023 returns by April 15, 2024 (April 17 if in Maine or Massachusetts).
• Business owners must file their 2023 personal tax returns by April 15, 2024 (April 17 in Maine and Massachusetts).
• Multi-member LLCs must file partnership returns unless taxed as corporations, while single-member LLCs must file with the owner's return.
• Sole proprietorships must file business returns with the owner's personal tax return.

An automatic 6-month extension to October 15 can be obtained by filing Form 7004 by the original due date. No reason is needed to obtain a federal extension, but some states require a statement of cause. Taking advantage of extensions can give more time to prepare and file accurate returns.

Penalties for Late Filing and Payment 

If you fail to file your business tax return or request an extension by the April 15 deadline, penalties may apply. The penalty is 5% of unpaid taxes for each month the return is late, which can increase up to 25%. If failure to file is fraudulent, the penalty can be 15% per month up to 75% of the unpaid taxes. Late payment penalties also apply for all taxes owed by April 15. This penalty is 0.5% of unpaid taxes per month, up to 25% maximum with appropriate Interest on late payments. Penalties can be waived if reasonable cause for lateness can be shown, like the destruction of records by natural disasters. 

Choosing the Best Tax Preparer for Business Tax Filing 

With complex tax codes and forms, frequently changing regulations, and the need to maximize deductions, most businesses can benefit from partnering with a tax professional. An experienced CPA, EA, or tax attorney can help ensure compliance, identify planning opportunities, and avoid costly mistakes. Trying to handle the business tax return process alone can lead to lost deductions, penalties, and error-prone filings. Here are four factors to consider while choosing your tax preparer: 

Expertise - Choose someone with specialized knowledge in business taxation along with expertise in your specific industry. An expert advisor will leverage eligible deductions and credits, avoiding filing errors.

Local Experience - Select professionals that have extensive experience assisting other businesses in your area. They understand local norms, tax incentives, and common compliance issues to provide an advantage over national chains.

Convenient Services - Seek a firm that offers services that make your life easier, like electronic filing, online portal access, year-round support, payroll help, and audit representation. Convenience can encourage staying compliant.

Affordable Pricing - Balancing expertise and value is ideal. Avoid the cheapest options.. However, high-priced advisors don’t necessarily equate to high quality. Seek fair, transparent pricing along with quality service.

Conclusion

As ever-changing tax codes, deadlines, and regulations present constant challenges for business owners, taking time to understand the nuances of business tax filings can be complicated. Partnering with expert tax professionals like NSKT can optimize your tax savings, ensure full compliance, and provide year-round guidance tailored to your business needs. With decades of combined experience assisting small businesses across all sectors, our expertise in streamlining tax filing, maximizing write-offs, and avoiding penalties can help you achieve financial clarity and the best outcomes this tax season.