While few people enjoy the act of preparing their income taxes, self-employed taxpayers have an even larger challenge. Not only is there more involved in filing as a self-employed person, but you also may not even know what you need to bring to the interview with your accountant.
To help you gain confidence and reduce stress during this tax season, here's a guide to what sole proprietors should bring to their tax appointment.
Once the calendar year has ended, begin collecting a complete record of all your business income. The IRS expects everyone to declare all their income regardless of whether or not you receive a Form 1099 from your customers.
The easiest way to track business income throughout the year is to have a separate business bank account and use it to receive all your payments. If you haven't done this, though, you can still reconstruct income from your bank statements, customer invoices, canceled checks, and online payment reports.
Avoid acting out the old cliche about presenting your tax preparer with a shoe box of receipts to sort out. Why? First of all, you will likely have to pay them to organize all these receipts and documents for you, and that can add up quickly. In addition, your accountant won't have any context for the expenses, so they may not know if things are missing or what certain expenses are for.
As you organize your receipts, separate them into categories roughly equivalent to those on IRS form Schedule C, which is the form your accountant uses to claim your business deductions. You may also want to note on each receipt what items or services you purchased so that your accountant can ensure expenses are categorized properly. This will save a lot of time for both of you during the interview.
If you use any vehicles to carry out your business, failing to keep track of mileage or expenses can result in losing money. Most business owners or self-employed people who use a personal vehicle for work should track business mileage throughout the year. Keep a log book or an app that records the date of each trip, the reason, and both starting and ending mileage. If you haven't done this during the year, take the time to reconstruct your mileage before filing taxes.
In addition to mileage, if the vehicle hasn't been claimed on your taxes before, bring information on the year, make, and model as well as its cost of purchase and mileage (beginning and end of the year).
Many taxpayers aren't aware of what they can or can't claim as a business deduction, so it's wise to bring up anything you're not sure about to your accountant and let them guide you. If you don't keep track of a questionable expense, you may not have the ability to use it if it turns out to be a correct deduction.
Some common business expenses that may or may not be fully deductible include the space used for your home office, utility costs, new computers, phone and wireless subscriptions, and travel. Be prepared to talk with your accountant about how much business and personal use each item receives.
If you made estimated tax payments either to the state or the IRS, bring in records of all payments made. Cancelled checks, bank statements, or acknowledgments from the IRS are excellent ways to show your payments. If you make payments through the IRS' website, you may also be able to get a report by logging into your account.
By spending some time before your tax preparation appointment to get your documents in order, you and your accountant can ensure that you don't leave any money on the table when it comes to tax time. For more help preparing your sole proprietorship taxes, contact our tax pros at Williams & Associates Tax Servicestoday.
