Things You Should Know About Tax Preparation for Small Businesses
The annual tax season is upon us! This article will discuss what you should know about tax preparation for small businesses in the United States and Canada. Are you ready to fill out all the paperwork and forms involved?
Important Income Tax Season Deadlines
When it comes to tax preparation for small businesses in the United States, companies should file copies of employee wages and non-employee compensation forms with the IRS by February 28. If they file electronically, the records are due March 31. Consult your accountant to make sure you’re meeting the deadline.
The exact filing dates for federal income taxes may differ from other businesses based on whether you follow a calendar or fiscal year. And how your business is legally structured.
When it comes to tax preparation for small businesses in Canada, these are the dates to remember:
- Companies should file T4s and tax slips by February 28
- Partnerships are required to file their taxes by March 31.
- The deadline for filing taxes for sole proprietors and individuals is April 30.
- If you are self-employed, the deadline for filing your taxes is June 15.
Companies that follow a fiscal year must file taxes no later than six months after the fiscal year ends.
If a tax due date falls on a weekend or holiday recognized by the CRA, you’ll have until the next business day to file your taxes.
Organizing Your Receipts
If your business is ever audited, you’ll need to have all the receipts for everything. The easiest way to do this is by sorting them into folders or using software that stores digital copies, so they’re easy to find.
Evernote is software that you can use to store receipts in digital notebooks. You may upload them manually or through an app integrated with Evernote.
Evernote offers a free plan, but its premium service starts at $7.99month ($9.99 in Canada).
ShoeBoxed is an excellent tool for helping you organize your receipts. It’s straightforward to use, and it helps make sure that if the IRS or CRA ever wants to audit, you’ll be ready.
ShoeBoxed plans start at 29 USD per month.
Expensify is a program that offers more than just receipts; it also manages expenses. It can automate expense reporting and mileage tracking for business travel.
Expensify is free to use, but premium plans start at 4.99 USD per month.
Updating Your Bookkeeping
A critical aspect of tax preparation for small businesses is ensuring that your books are in order. Auditing them will help make sure they stay organized.
Make sure to organize your financial records and look over everything. You want to categorize all of your expenses, such as payroll or marketing costs, so they’re consistent in how they are ordered.
If you have questions about bookkeeping, consult an accountant.
Sales Tax Requirements
When it comes to sales tax, American businesses have no federal requirements. The responsibility for charging and collecting the correct amount of taxes falls on individual states and counties or cities in some cases. Check with your local regulations before making assumptions about what you should be charging customers.
If you are a US-based retailer, there is a reporting period in which sales taxes must be reported to the state.
A sales tax nexus is an established presence in a state. It means having a physical location (like a store or warehouse) for some. For others, simply doing business like eCommerce can establish a nexus. Parameters vary from state to state.
Even if your business has been closed, you still need to file tax returns for periods where you had no sales.
To help with reporting and to pay sales tax, it’s recommended that you maintain a separate bank account for the taxes collected. Doing so will help keep track of how much money is owed to the government. It also puts in place controls on what happens when your business needs more cash than funds available, especially if someone else has access or control over this account.
Keeping Records and Reporting Sales Tax
Your business needs to keep records of every transaction. These need to note the amount and any sales tax collected. You also may be required by your state or locality for specific documentation like receipts and cash register tapes.
One of the other burdens of running a small business is paying taxes. Luckily, I learned to keep detailed records early on because it will help you stay organized and prevent any discrepancies or errors.
Automate your in-store sales taxes
There are many different sales tax rates and reporting requirements in the United States, so it is difficult for merchants to stay on top of their taxes.
Collecting sales tax is a necessary burden on any business, but it also means that you have money in the bank that can’t be spent. If you’re not careful with your cash flow, then when the time comes to pay up for all of those taxes owed, you might find yourself short-handed and unable to afford them.
There are three types of sales tax in Canada: PST, GST, and HST. The type you charge depends on the province your business is located in.
When collecting sales tax, some items are taxable, such as clothing and office supplies, while some things like groceries are not. In Canada, to charge sales tax, it is mandatory to be a sales tax registrant. To be considered a registrant with the CRA, a business must make more than $30,000 a year.
How Do You Know Your Sales Tax Reporting Period?
You can find out your reporting period by looking at the country and region you sell in.
Your reporting period may vary depending on the state you’re doing enough business in. Talk to an accountant to determine whether or not you have a sales tax nexus in a state.
When you open a GST/HST account, you will be assigned a reporting period for federal taxes. Most small businesses are given an annual reporting period, but it’s also possible to be set a quarterly or monthly reporting period.
Provinces with their own PST have different reporting periods, depending on how much sales tax is collected per year. You don’t have PST reporting responsibilities in areas that harmonized PST and GST into one rate as the HST. You don’t have PST reporting obligations in Alberta.
Verify If You Qualify for Tax Deductions
Small business tax deductions reduce tax liability. Business deductions can be used to lower the percentage of income that is taxable.
Keep a detailed log of your expenses all year long so that you can claim them when filing for taxes. Call an accountant if you think any of the deductions below apply to you.
Home office expenses
With work from home becoming prevalent since 2020, it is worth considering whether you can avail of home office deductions. The rules regarding this differ in the United States and Canada.
You are qualified for home office deductions if your home office is:
- Your base of operations; or
- Sees exclusive and regular use
The requirement for exclusive use makes it difficult to qualify for this deduction because it doesn’t matter how much you work in your home office; if the space is also used for personal or educational purposes, it is disqualified.
To qualify for the home office deduction, you must use your space regularly. If you only occasionally work from home, it does not count as a regular place of business and is disqualified.
There are two ways to calculate the deduction: a simplified method where you use the home office’s square footage, or the traditional method, where one measures home office expenses against the residence expenses.
If you qualify for this deduction, use Form 8829 to claim it.
The CRA has introduced a new way to claim home office expenses this tax season. The Flat Rate Method can be used by people who work from their homes due to COVID-19. They can use Form T777S.
To simplify the process of claiming home office expenses, a new deduction has been introduced that allows individuals who work from their homes more than 50% of the time due to COVID-19 or for four consecutive weeks.
You’re allowed a maximum deduction of $400 for the tax year. This flat rate method is only available for 2020 and does not require you to keep supporting documents.
If home office expenses exceed $400, you can use the exact method. This will require calculating how much space you have and providing supporting documents.
The exact method requires two forms to be filled out: Form T2200S and Form T2200. You will fill out Form T2200S, while your employer will fill out Form T2200.
In the United States, you may qualify for this deduction if your employer requires any education that is not necessary to keep your professional qualifications. Any expenses related to an advanced degree or other skills could also be deducted.
In Canada, you can also write off the education expenses required to update or maintain your professional license and/or designation for the business. This is important because it allows businesses to stay up-to-date in their industry.
Phone and internet costs
If you conduct any business transactions or conversations through the phone, internet, etc., you may qualify for tax deductions in both countries. You can only write off a percentage of your bill if used exclusively for work purposes.
Web hosting and online store themes
American businesses can write off domain registration fees and other costs from their taxes.
Canadian businesses that use their website for marketing or as an eCommerce hub can also deduct payments to web-hosting companies and online store themes.
Contractor work and salaries
American businesses can deduct salaries, bonuses, and incentives from income taxes. Contract labor must exceed $600 for the year to become deductible. If you hire veterans or long-term unemployed people before January 1, 2021, tax credits may be available.
If you are an employer in Canada, then the company can deduct any wages paid out. This includes contractors who your business has hired.
The IRS allows shipping costs as tax deductions if those expenses are ordinary and necessary (e.g., a retail store paying for shipping costs associated with purchase orders).
Meanwhile, the CRA considers shipping costs associated with business as tax-deductible.
In both the US and Canada, if shipping costs are related to manufacturing goods, they should be deducted under the cost of goods and services. If you have questions about this, consult an accountant.
US citizens may deduct expenses related to vehicle use, either through the actual expense method or with a standard mileage rate.
In Canada, you may be able to write off your vehicle expenses. You can claim parking fees, car payments, and repairs, as well as gas and insurance.
Keep in mind that if you use the exact vehicle for personal and business purposes, you will have to keep track of mileage separately. It is best to contact your accountant for more information.
Businesses can deduct any equipment used entirely for the company, such as a receipt printer connected to their POS system. But this is not true of home printers.
If you need to buy equipment for your business, like a point of sale system or shopping carts, the expense qualifies as a tax deduction in Canada.
In both the US and Canada, equipment is usually deducted over several years instead of one time.
In both the US and Canada, you may claim professional services you use for business reasons, including accountants, lawyers, and more.
When you donate inventory to a charity, make sure they give you some receipts. The IRS might allow this as an income tax deduction.
In 2020, there was a great need for donations to charities. If your small business donated supplies or money, you might deduct it from the taxes.
Client and employee meals
You can write off your business meals as long as you meet specific criteria. The feed has to be in a professional setting, and it needs to be with someone who is likely qualified for the job.
Here are some tips for navigating the deductions you can take:
- If you want to deduct 50% of the cost for a client meal, make sure at least one employee is present, and it’s not too extravagant.
- You can deduct office meals and snacks.
Consult an Accountant if You Have Questions
If you have any questions about tax preparation for small businesses, be sure to consult with an accredited business accountant. They can help make sure that everything is filed correctly and promptly.
Before meeting with your accountant, prepare a list of questions to ask them. This list should include:
Are there local tax credits available?
You may be eligible for tax credits that you don’t know about. Your accountant should have a list of these available to show you.
Does my business have a tax liability or nexus in other states or provinces?
This question is essential if you are selling online because it could mean that your company may be neglecting sales tax responsibilities.
Are there any advantages to changing my business structure?
It turns out that not all businesses file their taxes in the same way and simultaneously. Your accountant will tell you if there are any benefits for your business—they know best.
How can I file taxes online?
It is essential to file your taxes, whether you are in Canada or the United States. You can do it online.
Final Thoughts on Tax Preparation for Small Businesses
When it comes to tax preparation for small businesses, consider consulting an accountant. Here are some reminders when filing taxes:
- Get all your accounting documents together and fill out the necessary forms.
- Please fill out the necessary forms and send them to CRA or IRS.
- Pay any amounts due.
- Store your receipts and records in a safe place so that you can provide them if an audit is needed.