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By Purple Fox Legal

December 28, 2022

As a small business owner, tax season can be a stressful and overwhelming time. With so many laws and regulations to follow, it’s important to organize and prepare before the deadline arrives. In this article, we will discuss key things that solopreneurs and small business owners need to know about preparing for tax season. 

From gathering all necessary documents to understanding tax deductions and credits, we will provide tips and strategies to help you navigate the tax preparation process with confidence and discuss what to expect for the 2023 tax season.

Best Practices When Preparing for Tax Season

As a small business owner, it is important to start preparing for tax season well in advance. Some best practices for preparing for tax season include marking key IRS reporting deadlines on your calendar, keeping organized financial records throughout the year (i.e., previous tax returns, expense receipts, income statements, and balance sheets), staying up-to-date on tax laws, and being proactive in seeking out professional assistance. 

Remember to set aside a budget for tax-related expenses, such as hiring a tax professional or purchasing software to streamline the process. It is also advisable to gather all necessary documents and receipts in a timely manner to avoid last-minute stress and potential errors. 

Another important tip is to remember your responsibilities as an employer in terms of sending out pertinent tax documents. For example, if you are a business with employees (such as an S-Corp) and have a full-time employee, you should be sending them a W-2. Meanwhile, if you hire the services of freelancers, you may be required to send them 1099 forms instead. 

By following these best practices, small business owners can set themselves up for a successful and stress-free tax season. A written procedure for tax related tasks can also be beneficial. 

Common Business-Related Deductions

As a small business owner, it’s important to stay up-to-date on the various tax deductions you may be eligible for. As an example, with the increase in the number of solopreneurs and small business owners operating from their home, a common deduction is the home office deduction, which allows small business owners who work from home to claim a portion of their home expenses as business-related deductions.

Other common deductions that small business owners should look for include:

• The cost of business-related supplies and equipment, as well as any fees or subscriptions associated with running your business. 
• Business-related travel expenses, such as airfare, hotel accommodations, and meals. 
• Marketing and advertising expenses.
• Business-related entertainment, such as taking clients out to lunch or hosting a business event. 
• Credit card transaction fees. 
• Employee benefits, such as health insurance, retirement plans, and training programs.
• Charitable contributions made by the business. 

It’s important to keep thorough records of all business expenses and consult with a tax professional to determine which deductions you may be eligible for. Again, creating a written procedure for tax related tasks, such as a uniform method of organizing receipts, can assist in preparing for tax season. 

Why You Should Hire a Tax Professional 

Small business owners should hire a tax professional rather than do their own taxes for a number of reasons. First and foremost, tax laws (both state and federal) are constantly changing and can be complex, making it difficult for someone who is not a tax expert to accurately file their taxes. A tax professional has the knowledge and expertise to ensure that all tax deductions and credits are claimed and that the business is in compliance with all tax laws. 

In addition, a tax professional can provide valuable advice on tax planning strategies to help the business save money and avoid any potential penalties or fines. Hiring a tax professional can also save small business owners time and energy that could be better spent running and growing their businesses. Finally, if your tax return preparer is specialized in your industry, they may be a source of client referrals. 

If you run your business as a sole proprietorship, or as an LLC and you are the sole owner, you may choose to report your business income and expenses on Schedule C along with your personal income tax return. In this situation, a few things that can impact your decision to hire a tax specialist may include the following scenarios: 

• You also have a full-time job alongside your business, and you are not sure if your employer is withdrawing the right amount of income. You can ask a professional to provide guidance on form W-4 and whether you should increase or decrease the withholdings depending on your situation.
• You have foreign assets (such as a bank account outside the US) and may need additional reporting.
• You have student loans and are following an income-based repayment program.

Overall, the benefits of hiring a tax professional far outweigh the costs, making it a wise decision for small business owners and solopreneurs.

What to Expect for the 2023 Tax Season

There will be a few changes for the 2022 tax year compared to the prior year. The average refund is expected to be smaller than the last two years, given many pandemic-related tax benefits expired or changed (stimulus payments, expanded child tax credit, and child and dependent care credit). If you typically owe taxes, you may owe more in 2023 given the likelihood of being eligible for fewer credits.

In addition, reporting rules for Form 1099-K will change soon. You may receive a 1099-K form if you were paid more than $600 on third-party apps, such as Venmo or PayPal, for part-time work, side jobs, or selling goods or services. Before 2023, the federal Form 1099-K reporting threshold was more than 200 transactions worth an aggregate above $20,000, but the American Rescue Plan Act of 2021 changed the threshold to just $600, and even a single transaction can trigger the form. However, this reporting rule has been delayed by the IRS and won’t take effect until 2023.

Taxpayers should be prepared for these changes and seek the advice of a tax professional to ensure they are complying with the new laws and maximizing their tax savings. The IRS website is also a great resource for entrepreneurs who want to learn more about their potential tax liability.

Conclusion

As an entrepreneur, you need to make sure you are ready for tax season by marking all relevant reporting deadlines on your calendar, having all the necessary forms and documents organized, and understanding your responsibility as an employer. Keep track of all applicable deductions after discussing them with your accountant to reduce your tax burden. Finally, make sure you are prepared for the new changes in tax laws that may affect your situation in the 2023 tax season. 

***Disclaimer: Purple Fox Legal, PLLC does not offer tax services.