With a new year comes another tax season and Tax Day. While Tax Day can leave small businesses scrambling to gather all the necessary documents, there are several ways to prepare. We list several actions you can take to ensure your business is ready before the deadline.
The deadline for Tax Day in 2023 is April 18th, giving companies several months to get ready. While the standard deadline is April 15th, the deadline must be on a weekday. Since April 15th falls on a weekend this year, the deadline falls on the next weekday. However, April 17th is Emancipation Day in Washington D.C., where the IRS is headquartered, moving this year’s Tax Day to the 18th. Below we’ll discuss several aspects to consider.
Electronic or paper filing?
Generally, the IRS will accept electronic federal income tax returns by the end of January 2023. Paper tax returns will start processing a week or two later. There are benefits and drawbacks to both methods.
Paper filing can be more secure than e-Filing as it does not require storing information electronically, potentially providing a safeguard against having information compromised. However, paper filing takes longer to process than e-Filing and requires organizations to wait longer to receive tax refunds.
E-Filing has shorter processing times than filing by paper allowing businesses more time to make necessary corrections and receive refunds faster. Further, it is generally more accurate than paper filing as e-Filing software does calculations for you, leaving less room for error. However, e-Filing requires you to submit information online, and despite regular backups, there is a chance of losing data or having it fall into the wrong hands.
IRS Forms used by businesses
Businesses must file taxes differently than individuals, and it is crucial for business owners to understand federal, state, and local taxes. Companies must complete IRS forms annually; the most common ones are the Schedule C and Schedule SE forms for sole proprietors and Forms 1040 and 1120 for corporations. Moreover, some organizations may have industry-specific forms to fill out and may qualify for tax credits relating to their field.
Tax deductions and credits
During tax season, companies likely want to know whether they can reduce their tax burden through tax credits and deductions. Tax credits directly decrease the amount of tax a business owes, while tax deductions are business expenses that can lower taxable income. While credits give the same amount of benefits regardless of business size, deductions are more beneficial to companies in higher tax brackets.
Some of the most common tax credits include research and development, paid family leave, and increasing access for people with disabilities, all of which can help small businesses reduce operating costs.
One of the most widely used tax deductions is to use business expenses to reduce your taxable income. For example, if you have $200,000 in taxable income for the year and have $50,000 in business expenses, your taxable income drops to $150,000. IRS-qualifying business expenses can range from supplies, vehicles, travel expenses, internet, and more.
Determine if you need an extension
While the Tax Day deadline is April 18th, some companies may not be ready to file taxes by then. Some reasons you may not be able to file on the initial deadline include complex returns, being out of town, and limited time to file.
Fortunately, the IRS allows S-Corporations to extend their tax return deadline to September 15th and C-Corporations to extend theirs until October 16th. If you decide to file an extension, you must complete and submit Form 4868 on or before April 18th. Additionally, you must fill out form 1120 by the extended deadline and pay any liability you owe before April 18th.
2023 third-party payment changes
One of the notable changes for small business tax returns in 2023 is reporting third-party payments. If your organization received any third-party payment over $600 during 2022, you must complete and submit IRS Form 1099-K. If a company makes a mistake on the 1099-K, it must compact the third-party payment network.
While filing tax returns can be time-consuming, knowing what to do ahead of time can help your company be ready for Tax Day.