Business Tax Preparation

Taxes are a cost of doing business, both for businesses and for individuals. Planning for and managing income taxes is a profit center unto itself. Good small business tax planning, implementation and preparation do not cost, they pay. Remember that it is not always what you do, but when and how you do it that makes a difference in the tax bill. Prior tax-planning prevents overpayment in taxes.

Business Tax Preparation

Preparing your own business tax return, especially for the first time, can be a frustrating experience if you don't have all the necessary information at your fingertips. Gathering certain documents before you begin will help you fend off the frustration.

Here's a list of items you may find helpful when preparing your business tax return:

• Last Year's Business Tax Return
• Articles of Incorporation
  
• Partnership Agreement
  
• Accounting Records
  
• Bank Statements
  
• Credit Card Statements
  
• Payroll Reports
  
• Detail of Asset Purchases
  
• Depreciation Schedules
  
• Detail of Asset Dispositions
  
• Vehicle Information
  

Last Year's Business Tax Return

Your previous year's return also is a great comparison tool once you complete your current-year tax return. It can raise red flags about possible missed deductions or items that seem unusually large or small in comparison to the prior year.

Articles of Incorporation

If you don't have your prior-year tax return, or are filing a tax return for a newly incorporated business, your articles of incorporation provide certain necessary information.

• List of officers

• List of shareholders and possibly ownership percentages (if an S corporation)

• The state in which you incorporated your business

Partnership Agreement

Without a prior-year tax return, your partnership agreement is the best source of the following:

• Date the partnership started

• List of partners

• The amount of money each partner initially put into the partnership and current ownership percentages

• Details about any specific income or expense items that are NOT allocated based on profit, loss or ownership percentages

• The method you use for tracking your business finances

Accounting Records

Income and expense records are the basis of your tax return. Depending on your level of gross receipts and assets, you may need balance sheet information as well. If you use accounting software, such as QuickBooks or Quicken, to record your financial information, print out a Profit and Loss Statement and a Balance Sheet for quick reference as you begin your tax return. If not, you may wish to compile this information in an Excel spreadsheet. Regardless of which software you use, organizing your accounting records makes tax preparation much easier.

Bank Statements

Your bank statements or checking account records are a window into your income and expense activity for the year, particularly if you don't already have organized accounting records. Analyzing deposits and expenditures will enable you to categorize income and deductions to prepare your tax return. It's a good idea to reconcile your ending cash balance to the checking account balance on your last bank statement of the year to ensure you've captured all cash transactions in your accounting records.

Credit Card Statements

Small business owners often don't have time to keep track of day-to-day expenditures such as gas, parking, meals, supplies, equipment and other items. But knowing how much you've spent on them can be important at tax time when it comes to calculating your write-offs. Your credit card statements can be a big help in sorting out these expenses, so keep those statements handy. Particularly valuable will be a year-end summary statement which breaks down expenditures by category, if your card issuer provides one.

Payroll Reports

Your payroll tax filings, both federal and state, will help ensure that you have the correct payroll and payroll tax expenses in your accounting records. Remember that the payroll taxes you withhold from your employees' wages are not an expense to the business.

Detail of Asset Purchases

Major assets you buy for the business often aren't fully deductible in the year they are purchased but must be written off, or depreciated, over a number of years. Have the following information available for these assets:

• Cost of the asset, including any sales tax paid

• Description of the asset

• Date put into service

• Amount of time the asset is used for the business (versus for personal use), stated as a percentage of total use

Depreciation Schedules

If you're preparing your own tax return for the first time, you'll need to enter the details of the business's existing depreciable assets up to this tax year into the software. The software will calculate the depreciation on these assets going forward. You'll need the following:

• Description of the asset

• Date put into service

• Original cost of the asset

• Accumulated depreciation up to this tax year

• Business use percentage (if applicable)

• Recovery period of the asset (3 years, 5 years, 7 years, etc.)

• Any Section 179 Expense (or first-year expense) taken in the first year of service

Detail of Asset Dispositions

If your business sold any depreciable assets during the year, you'll need the following information to calculate any gain or loss on the sales for tax reporting purposes.

• Description of the asset

• Date of sale

• Sales price of the asset

• Any expenses of the sale

• Accumulated depreciation (if not calculated by the software)

Vehicle Information

If the business owns any vehicles that are used by employees or shareholders/partners for personal and business use, you'll need the following mileage data:

• Miles driven for business

• Personal miles

• Commuting miles

Taking a little time to gather your tax-related documents will pay off, in time saved and frustration eliminated.

• Expensing equipment purchases.
  If you buy office furniture, a computer or other equipment for your business, you may be able to deduct the cost up to $125,000 (up from a $108,000 in 2006), rather than having to claim depreciation over five or seven years in most cases. This deduction applies to both new and used equipment, whether you pay cash or finance some or all of the bill.
  Key requirement: You need to be profitable to benefit from the deduction, something you can determine when you file your taxes next year. Note: When annual equipment purchases top $430,000 in 2006, the expensing limit is reduced dollar for dollar; no deduction can be claimed when purchases reach $538,000.

• Saving for retirement.
  Sock away money with the help of Uncle Sam by using qualified retirement plans, such as 401(k) plans, SEPs, SIMPLEs, and profit-sharing plans.
  New as of 2006: The limits on tax-deductible contributions have increased for qualified retirement plans. Also new for 2006, 401(k) plans can be modified to accept after-tax contributions to Roth 401(k)s as a way to build tax-free retirement income. Note: If you want benefits for yourself, you may have to provide them for your staff. Assess the cost of coverage, weighing it against the intangible you receive from engendering employee loyalty for providing this benefit.

• Making energy improvements.
  The high cost of gasoline and other energy prices should be a wake-up call to employ conservation measures. Again, federal (and in some cases state) tax breaks encourage conservation. Under federal law, you may qualify for a tax credit by buying a hybrid vehicle or for a deduction by bringing your building up to certain energy standards. These new energy breaks in most cases apply only for 2006 and 2007, so learn what they are and whether you can take advantage of them.

• Explore health insurance options.
  Like energy costs, health coverage continues to rise. Determine whether health savings accounts (HSAs) make sense for your business. These savings accounts combine with a high-deductible health plan to lower premiums while affording a savings opportunity. Contributions to HSAs are tax deductible within limits and earnings are not taxed when withdrawals are made for medical expenses.

Most important: Make sure your recordkeeping practices are in order. One of the major reasons why businesses fail to claim all the tax breaks they're entitled to is because of careless record-keeping and missing receipts.

We can work with you to ensure your business's compliance with new tax laws and your qualifications for tax breaks. Call us today to set up an appointment.

5830 Oberlin Drive, Suite 304
San Diego, CA 92121
Phone: 800-731-8122
info@proplanusa.com