I Started A Business Last Year - What Should I Know About My 2021 Business Taxes?
For anyone who started a business in the last year or so, you've got plenty to worry about - don't let your business taxes be one of them. Join us for a 30-minute webinar with Rick Bromund, where he'll walk attendees through important tips for new businesses.
Rick heads up the tax research team at ComplYant. He's an experienced professional in the tax industry and has previously held positions at Fortune 500 companies as well as one of the big 4 accounting firms.
Note: This topic covers U.S. business taxes only.
- 1:49 - Important tax dates
- 3:59 - How to keep good records?
- 8:12 - What if I received a grant or loan?
- 9:05 - Deductible business expenses
- 10:20 - Separate business from personal
- 13:27 - Review & verify
How does the process work to file your business taxes?
Similar to individual taxes, again, if you're expected to file estimated taxes, you file those throughout the year as tax time comes you work with your tax professional, or if you're doing it yourself you just go through the process with the tax preparation, you submit your deductions, all your income information. So it's pretty standard to how individual taxes are filed. And if you're an LLC or a pass-through, you're filing your business taxes on your personal return.
How do tax write-offs work for an LLC versus a sole proprietorship?
Tax write-offs work the same way. Obviously the LLC versus the sole proprietor, there's no incorporation, so there's no, as far as the government sees, a division between personal and business. So the burden is probably gonna be on the sole proprietor to have really good impeccable records to show that these expenses if they're coming out of a personal account are for business and having a really good backup. But the deductions are the same, whether you're a sole proprietor or LLC corporation, your small business has deductions available to you.
Any new tax breaks for new companies?
As far as new companies, really what we're looking at right now is the startup costs. If you started a new company in the last 12 months, startup costs, and organizational costs will be deductions that are specific for new companies. Otherwise, pretty much you're gonna benefit from the standard business deductions that are out there. There are a bunch of them, again, we provided that website at irs.gov/credits-and-deductions. You can check it out there. There's a host of things to help small businesses. You know, it's not cheap and it's not easy to start a business. So they provide a lot of opportunities to deduct the costs that you face to kind of lower the barrier to entry.
Webinar Transcription: I Started A Business Last Year - What Should I Know About My 2021 Business Taxes?
Fran: Hi, everyone. Thanks for joining today's webinar. We're excited to have you with us today. I'm Fran, the customer champion here at Complyant, which is a technology platform that offers business owners and entrepreneurs a simple way to manage tax rules and requirements. If you haven't yet, please check us out at complyant.co, which is C O M P L Y A N T dot co.
Leading today's webinar is Complyant's very own, RickBromund, who heads the tax research team. Rick is an experienced professional in the tax industry and has previously held positions at fortune 500 companies, as well as one of the big four accounting firms. Although we are tax compliance software, we are not an advisory firm. Any information provided by our team members is not intended to be taken as advice or to be perceived as a specific position on any subject of tax law.
Now, before he gets started, please feel free to text your questions either in the chatbox or the Q and A box, both are listed at the bottom of your zoom screen, and we'll get to them at the end of our talk. Thanks so much, and take it away, Rick.
Rick Bromund: Thanks, Fran. Thanks, everyone, for joining us today. Our topic today is what should I know about my 2021 business taxes for a new business that's been started within the last year or so. So let's jump into it. Staying up to date. Historically, tax day has been April 15th. If you've been aware of the last couple of years or so, we know that that just hasn't held true. For the 2019 taxes filed in 2020, the date was moved to 07/15; for 2020, filed in 2021, it was moved to 05/17, and this year's taxes for 2021 that are filed in 2022 is on April 18th this year, although that's not a pandemic related adjustment that's due to the Emancipation Day observed in Washington DC.
So why is it important to stay up to date? First off, it's important to know these dates for the 2020 and the 2021 taxes that were filed in those years, and they were changed a few weeks before the April 15th deadline. And another thing to be aware of is while the deadlines were changed, be aware of who they were changed for. So for the May 17th deadline, it only affected individual filers. So corporate returns were still due 04/15, and if you had an S Corp or partnership, those returns were still due 03/15 because the announcement didn't come out until after those returns were due. In addition to that, while the extension was granted for individual filers, estimated payments were still due on the original deadline of 04/15.
So again, 2022's tax day is currently April 18th. There's no talk of any extensions. So the best advice right now is to proceed as if it will stay April 18th, but always be aware of the last-minute changes that could happen and extend it to whatever date the IRS decides.
Keeping good records. How do you keep good records? Save everything. And I know it seems, and you know "save everything," like we're being ridiculous. But literally, save everything related to your business. Some good examples of things to save are receipts, invoices, and employee records, if you have them, and have noted in prentices here, what I'm referring to.
So this is the basic timeline/timeframe that you're supposed to keep these items: receipts and invoices for three years, employee records, employment tax records for four, and I've noted down previous tax returns. There's no timeframe to keep your previous tax returns. It's just good practice to have them on hand for when you're doing your previous returns. Things come up in life where they ask you for two, or three years of historical returns that you need to provide for financial information. It's just good practice to keep those handy and in a safe spot.
In addition to invoices and receipts and employee records, you can keep cash register tapes, just anything that's related to your business, it's better to have it, even if you think you don't need it than to need it and not have it when that time comes. And a little bit about the timeframe on there. So the three years or any timeframe, whether is three years, four years, or six years, whatever the statute is for the particular item or record we're talking about, it is from the date that the return was due.
So if we look at last year and last year's tax day was May 17th 21, but you filed early. You filed on March 1st. So you have to hold on to receipts and invoices for three years. So when March 1st, 2024 comes round, you're going through your closet, your record books, you say, oh, you know what? I can get rid of this shoebox of records from three years ago.
Hold on. Not so fast because it's from the date that the return was due. So even though you submitted it in March, the statute goes through 5/17/24. Just a little bit of information to keep in mind. Also, exceptions to the rule. If you're under audit, if there's any kind of fraud, whether it was deliberate or not, or the IRS detect fraud or in their mind it's fraud, there is no statute of limitation on records. If they think something was done fraudulently, they can go back indefinitely. So that's a good case for just keeping that shoebox in the back of your closet, kind of forgetting about it. You have it there if you ever need it. Also things the note about, a lot of information is also available online.
Let's take an example, bank statements. So bank statements, banks are required to keep statements for five years. However, most banks only keep them available online for one to two years. So let's say, you have an audit come through and you need three years of information, but you only printed out the first two years. You go to the bank, and they say, "yeah, we have that information, but you have to request it." So they're not gonna be able to send you an electronic copy right away. There's usually a small fee. The fee is really not the burden that comes with this. It's putting in the request from the bank and then waiting for them, in most cases, to actually mail you that statement.
And the IRS, when they're looking for information, generally, they don't give long periods. So you're kind of under the crunch and the bank has no stake in it. So they're not gonna move just cuz you're in a hurry. So a good practice could be, you know, at the end of the year, download those bank statements, toss them in that shoebox, forget about them, hopefully, you'll never need them but if you do, they're there. In addition to good record keeping outside of the receipts and invoices that we talked about, docs to keep in a safe and secure space outside of your tax docs, corporation documents, licenses and permits, any annual reports, or other reporting that you filed and even contracts that you have. It's good to keep those in a safe and secure place.
What if I received a grant or loan? So obviously small businesses have grants that they can apply for, or they can even take out a business loan, a couple of distinctions between the grants and loans. So if you receive the grant as you'll know, it's very competitive, it's a set amount of money that people apply for. And it's only awarded based on a certain set of circumstances.
What to know about grants is there's no payback, usually. However, that money you receive is treated as income. So what that means is it has to be reported on your return as income and is therefore taxable. The difference with loans is loans need to be repaid with interest. However, they reconsidered liability as not taxable. And in fact, depending on how the money was used, some interest payments may be tax-deductible. So speaking of deductions, we're gonna move on to examples of business expenses related or business expenses that can be deducted.
As we just mentioned, certain loan interest can be deductible, travel, meals, office or coworking space or rental fees, things you bought for your home office, renovations, utilities, furniture, tech, and things like that. There's a whole slew of deductions available for small businesses. And you can find more of that at the link that we provided below at the irs.gov forward-slash credits and deductions.
One other deduction that really stands out at the top of what we're talking about now is you started a small business within the last year. So startup costs for small businesses are also tax-deductible. Certain startup costs and also organizational costs are deductible. And this really applies to the core audience that we're talking to today is someone who started their small business in the last 12 months. So separate from personal. Here, we're talking about how or why we should keep business finances separate from personal finances. The how, how would we do it?
For starters, you can incorporate. Incorporating a business is gonna create a separate entity. So it's gonna separate the business owner's personal finances from their business finances. Another way to go about it is after you've incorporated is to create a business checking account. With that checking account, you've can apply for business credit cards, business loans, anything. So when you're making purchases for your business, it's separate from your personal finances. And why is this important? For the most part, it reduces personal liability from your business obligations.
And let me explain that part. So if you started a side business, it was kinda like a side hustle and maybe it blew up and now it's your primary thing, but you never did anything when you first started, you never incorporated it, never filed for a federal employee ID number. So if you do nothing by default, you're considered a sole proprietor. The sole proprietor is a hundred percent liable for the business. So there is no separation between business and personal finances. So all the liability falls on you.
When you incorporate or file an LLC, as a title says, LLC limited liability, you're limiting your liability to what an outside person can come after you for, in basic terms. So let's say you put in a certain amount into a company, someone sues that company for whatever, you know, assume wrongdoing or whatever. Your liability is only up to what you invested in that company. They can't come after your personal assets, they can't come after your house, things like that. However, as a so proprietor everything's on the table. They can come after all of your personal assets because there's no dividing line between that business and personal.
Secondly, it simplifies the tax process. So if you open a business checking account or a business savings account, whatever, and credit card, so all your business purchases were done through the account or the credit. Tax time comes, you're going through your receipts, you wanna see all your expenses, all the items you can deduct, you go right to your business account, you download that information, you know, because you've been a stickler on only using your business account for your business purchases, that everything on there applies to it.
So everything that's on there, all the gas station trips, all the business meals, all that is neatly organized and you don't have to separate from your personal account what would apply for your business tax deductions. Review and verify. So when you set up your initial business, you apply for all the proper permits, if applicable, you registered for sales tax, you got your business license, and you filed or will file an annual report.
So why am I looking at this again? Let's say your business has expanded in the past year. Let's say you opened into a neighboring state or a couple of states or you're selling online. Sales tax nexus rules, so if you're selling products online into other states, you wanna make sure if you crossed any of the thresholds if you have a certain number of sales or a certain dollar amount in sales into another state, that if you've met their requirements to register that you register your business.
So you registered to collect sales tax in those locations. If you did open a new location in a neighboring state or even a different city in your same state, you wanna make sure that you've applied for the new business license for those locations. The same thing again, if it's a different state and you register to do business, you wanna make sure that you have your annual report requirements ready, whether it's yearly or twice a year, whatever the requirements are, you wanna make sure you're on top of that.
Also, industry-specific permits or licenses. And this is interesting because this really can get granular to what your business is. For example, if we're talking pet sitting, you started a side hustle last year and you're on one of the websites and you said, you know, I'm gonna be a pet sitter. And you're going to someone's house and you're watching their dog while they're out of town. You figured out a way, you know what, my house really can support, I don't need to go to someone's house. My house can support 2, 3, or 4 separate dogs at a time. I think that works better for me and I get to be home. Well, you wanna make sure that change and wherever you're located in the various requirements because some states and jurisdictions will say, you know if you have three or four dogs on your premises that you're taking care of, you're now required to geta kennel or a boarding license.
So little things like that, the gig economy as we're seeing is exploding. So laws and states and localities are really catching up to try to find a way to regulate a lot of this stuff. And before I think they're trying to blanket it under currently existing laws. So it's really important to just make sure as they're catching up to the times any new requirements or restrictions that they're putting on or licensing requirements that you're aware of and that your business follows them.
Bottom line. So really what we talked about here comes down to developing good habits, keeping good records, staying up to date, and separating business and personal finances. It's really developing good habits if you haven't started these yet, but not to worry, now is as good a time as any. So it is never too late to start today. You go into gas up the car that you use for a business trip and save that receipt. If you've been doing all your business transactions from your personal accounts, never too late to just call the bank, and make an appointment to set up that business checking account. So really it's developing and keeping good habits.
Secondly, it's educating yourself. Educating yourself through webinars, and blogs such as this. ComplYant provides webinars and blogs, and there are other avenues too as well. Take any opportunity you can to read an article, look at a blog, or sit in on webinars. Most importantly, ask questions. If you have a tax advisor, tax preparer, or anyone who you're getting advice from when they sit and tell you something, how your taxes are being done and what deductions you're taking or applying for, ask questions. Ask, why are you getting this deduction? How are you getting this deduction? Why does it apply? Things like that. And by no means, are we expecting you to become an expert, but the more you can educate yourself, the more informed business owner you can be. And I think that will just help you and your business all around. So with that, I'll open it up for questions.
Fran: Again, you can drop your questions in the Q and A and chat boxes now. And if you do not want to ask them live, please feel free to send us an email at firstname.lastname@example.org, which is H E L L O @ C O M P L Y A N T.C O. And some of the questions have already been submitted, let's go through those. Any new business tax breaks?
Rick Bromund: And, first, thank you, Fran, for the question. Now I'll just reiterate, you know, we are not an advisory firm, so the questions we answer, we want to keep in general terms. Nothing that we say should be taken as advice or a specific position on any tax law. So we're gonna do our best to give you any tips. But if you do have more questions, detailed questions, please reach out to your tax advisor or tax professional.
Any new tax breaks for new companies? I believe that was the question. So as far as new companies really what we're looking at right now is the startup costs. So if you started a new company in the last 12 months, startup costs, and organizational costs will be deductions that are specific for new companies. Otherwise, pretty much you're gonna benefit from the standard business deductions that are out there. There are a bunch of them, again, we provided that website at the irs.gov forward-slash credits and deductions. You can check out there, there's a host of things to help small businesses. You know, it's not cheap and it's not easy to start a business. So they provide a lot of opportunities to deduct the costs that you face to kind of lower the barrier to entry.
Fran: Another person asked how do I pay taxes as a small business owner?
Rick Bromund: As a small business owner. So anyone when you're a business owner, you're not a waged employee, so you're not receiving a W2 as a normal employee, you are your own boss, your own owner/operator. Technically, if you're expected to pay a thousand dollars or more in tax, you should be submitting estimated tax payments quarterly.
So as far as paying your taxes, IRS has the forms, you calculate how much you think you're gonna pay throughout the year. And then you submit the tax based on that amount to the IRS on a quarterly basis. And as you go through the form, it can chew up, if you estimate it too much for the first quarter on the second quarter, on your information, it'll have your actual amount due, and then it'll adjust as you go through.
And just like playing normal taxes or individual taxes if you're worried about paying too much when you go to actually file your tax return, you'll actually enter in all your credits and deductions. And if you did overpay, you would get a refund just as if you're filing your individual taxes.
Fran: Great. How does the process work?
Rick Bromund: How does the process work? Assuming we're talking about how the business tax, how do file your business taxes. Similar to individual taxes, again, if you're expected to file estimated taxes, you file those throughout the year as tax time comes you work with your tax professional, or if you're doing it yourself you just go through the process with the tax preparation, you submit your deductions, all your income information. So it's pretty standard to how individual taxes are filed. And if you're an LLC or a pass-through, you're filing your business taxes on your personal return.
Fran: Wonderful. Someone has an LLC business with their spouse. What would be the best approach for newly created small business owners?
Rick Bromund: So you have an LLC with your spouse, so that's good. So you've incorporated, you're an LLC, you've restricted your liability. In addition to some of the things we mentioned previously about keeping good records, staying up to date, and separating business from personal, with an LLC, but especially a family LLC, it's very important to have partnership agreements and organizational agreements to make sure everyone's on board with who's doing what and it's clear operations and clear communication about whos responsible for what.
Fran: Great. What if you don't have all your receipts?
Rick Bromund: If you don't have all your receipts, not to worry. I know we talked about it as part of keeping good records. Probably even the biggest stickler for that doesn't have every receipt. If you don't have every receipt or if you haven't kept receipts, start today. The biggest thing, if you're claiming the deduction and you don't have your receipt, I believe the IRS says you have to have a receipt for anything over $75 and it's not required for anything under, but the biggest issue with the receipt is you have to know when and where.
So if you're claiming, let's say, oh, I gassed up on whatever the time, you need to know where it occurred and the time. So that way they can trace it back. Also, if you don't have the receipts, but you do have, let's say a separate business checking account, you can also go back, and look at your checking account. And if you know the day and the location, you can pull it from those records while it's not a receipt, it still ties back to the deduction that you're trying to take. When it comes under scrutiny or if you find yourself under audit, any information you can provide gonna be better than nothing.
Fran: Wonderful. What if you didn't make any money, do you still have to file?
Rick Bromund: Yes. So if you started a business and you didn't make any money but it's registered, you still have to file your return. You know, either a zero return or a negative return but you still have to file that return because the IRS has a record of your business. And they don't know that you didn't make any money, so you have to tell them. And the only way they'll know is when that return is filed.
Fran: How do I include deductible expenses?
Rick Bromund: So just the same way as if you were doing your individual tax returns. So as you're going through your return, you have, assuming your box of receipts, your list of whatever we're talking about, whether it's meals or rents or anything like that, you would just enter in under the deduction section when you're about the business aspect of your return.
Fran: Are there any special tips for pet-related businesses?
Rick Bromund: Good question. And we use the pet sitter example there. So outside of making sure that wherever you're sitting hasn't implemented new requirements for pet sitting or for boarding, really, petsitter can be brought down to just any specialized industry. So there's gonna be special requirements, especially as this gig economy really goes into it, whether it's pet sitter or anything like that, you really wanna stay on top though, if your industry-specific regulations or rules have been brought by, you know, it could be stated, could be county down to your locality where you're at.
Fran: We have a few more that were submitted. Do we still wanna go through those real quick?
Rick Bromund: Sure.
Fran: Okay, perfect. Any tax consequences if you started an S Corp in December?
Rick Bromund: So if you started an S Corp in December without more detail, if you startedit as acompany and you took the S Corp election in December, you'll file your taxes still as a C Corp. If you're talking about that you started your new business in December and registered it right off the bat as an S Corp, you're still gonna have to file a return and the tax consequences will be whether you made any income in that one month period. I hope that answers the question.
Fran: How do tax writeoffs work for an LLC versus a sole proprietorship?
Rick Bromund: Tax write-offs work the same way. So if it's you know, obviously the LLC versus the sole proprietor, there's no incorporation, so there's no, as far as the government sees a division between personal and business. So the burden is probably gonna be on thesole proprietor to have really good impeccable records to show that these expenses ifthey're coming out of a personal account are for business and having a really good backup. But the deductions are the same, whether you're a sole proprietor or LLC corporation, your small business has deductions available to you.
Fran: And we're just gonna answer one last question. Are there any required filings for an owner/operator trucking business?
Rick Bromund: So this is a specific industry question. So are there specific filings? There's gonna be specific filings if the trucking business is interstate depending on what kind of trucking business, what the weights of the cargo that they're moving. It's really gonna be important to what kind of federal guidelines, especially if you're going interstate cross-country, if you're local, to see what your local state has.
But really outside of that, you gotta make sure, let's just say it's a local trucking company, you wanna make sure that you have the business licenses that you're registered. There's probably, I'm gonna think definitely county and state requirements for those types of industries. So really it'smaking yourself aware of what's required where you operate.
Fran: Great. Thank you so much, Rick, for hosting today's episode on what should I know about my 2021 business taxes. And thank you everyone for joining us. For more information, email us at email@example.com, which is also on the chatbox,and send usany topic ideas you'd like for us to cover in our upcoming webinars. Thank you so much, everyone again for today. And thanks Rick for leading today's talk. Have a great day.
Rick Bromund: Thank you.