Just like individuals, businesses need to pay taxes, but because you have to calculate your own taxes throughout the year, getting your business taxes in order and accurately filing them can be difficult. This is why many companies choose to hire tax preparation experts.
But there are plenty of businesses that would rather try to calculate their taxes on their own and hope they can get it done right so they can rest easy when tax season rolls around. If you are one of these types of business owners, check out the tips below.
Understand How Purchasing Affects Business Taxes
Just about every decision you make for your business will have some kind of tax implication. For example, if you decide to buy, rather than lease, a new car for your business, you will not be allowed to deduct the price of the car on your taxes, even though you would have been able to do that with every lease payment you made. However, you would be able to deduct some of the annual depreciation of the vehicle.
Every business needs to make a variety of purchases, both large and small, throughout the year, and smart business owners will know how to deduct these purchases from their taxes. Letting the IRS know how much money you spent on your business, as well as how these expenses impacted your profits, will help you reduce the amount of money that you owe when tax season rolls around. Therefore, be sure to properly educate yourself on how purchases can be deducted from your taxes in order to save money.
Choose Your Accounting Method and Tax Year
In addition to carefully making purchasing decisions that will impact the way you calculate and file your taxes, you also need to determine the tax year, or the time period during which the taxable income you generate will be calculated. The completion of your tax year will serve as the cut-off date for tax-saving strategies, as well as income accrued and expenses that have been paid.
Another thing you need to determine is your accounting method, regardless of what type of business you operate and whether you are an Limited company or a sole Trader. This accounting method has to be reported to the HMRC, and the two main types of methods are accrual and cash. You may even be able to implement a hybrid method that combines the best of both, or you can use special accounting methods, if necessary.
Paying Estimated Taxes
It is a good idea to estimate how much you owe in taxes quarterly. This is a good option for independent contractors and freelancers whose income fluctuates. Basically, you will be paying your taxes in advance, just like any other employee would, and then you would calculate how much you owe, or how much of a refund you are owed, when you prepare your tax returns.
This method will allow you to pay taxes along the way and avoid a penalty at the end of the year for failing to do so. However, calculating the amount of money that you owe every quarter means that you will need to calculate expected adjusted gross income, as well as taxable income, deductions, taxes, and credits for the whole year.
Form 1040-ES helps you calculate quarterly estimated tax payments, and it also has a worksheet that will assist you in estimating how much you owe for the year. If you are a corporation however, use Form 1120-W instead. You can also use last year’s tax return to estimate this year’s taxes. Just be sure to include all of the deductions and income that you expect to use on this year’s return.
Hiring an Expert to Help You
No one ever said that calculating your business taxes would be easy, regardless of what type of business you operate or how large or small your company is. However, if you do ever find yourself in a bind and you need some extra assistance to navigate the process and accurately calculate your business taxes, it really is best to hire a certified public accountant (CPA) or a tax expert who has dealt with businesses and can do the hard work for you. This will let you rest easy knowing you’ll pay what you owe and get what you’re owed.
Even though it can be a bit confusing at first, once you are comfortable calculating your business taxes, it will become like second nature. And you should also notice that it becomes a lot easier to file your tax return at the end of the year too.