Tax season preparation rates right up there with getting a root canal or jury duty – no one wants to do it. It can be overwhelming – especially for small business owners – hijacking your calendar, your sleep, and often taking a bite out of your bottom line. One of the smartest moves you can make is keeping your business and personal finances separate.
Luckily, with tools like e-statements, online banking, and digital payment options, getting organized is easier than ever. We’ve put together these handy tax season tips and resources to help you prepare smoothly, whether you’re filing as an individual, a business, or both.
Gather and Organize Your Tax Documents
No matter how you run your business – electronically, on paper, or a combination of both – clear documentation of your income and expenses is key to a stress-free tax filing. Here’s what you will want to have ready:
- Gross Receipts: This is all the income your business received. Think cash register data, credit sales info, invoices, receipt books, deposit records, and 1099-MISC forms.
- Business Purchases: Items you buy to resell or materials used in your products. Keep track of what you paid, proof of payment, who you paid, and what you bought.
- Business Expenses: These are the costs of running your business. To be deductible, expenses must be “both ordinary and necessary.” Examples include rent, utilities, travel, insurance, office supplies, advertising, contract labor, education, internet service, legal fees, salaries, and benefits. Keep receipts, statements, and canceled checks handy.
- Business Assets: Tangible property like office furniture, machinery, or equipment. Also include improvements to your property like roofs or security systems. For annual depreciation, you’ll need purchase prices, usage details, and proof of payment. Keep sales invoices if you sell assets.
- Employment Taxes: If you have employees, maintain payroll records showing wages, benefits, and withholdings. The IRS requires you to keep these records for at least four years.
How Your Business Structure Affects Your Taxes
Your business type has a significant impact on how you file federal taxes. Here’s a quick overview:
- Sole Proprietorship: You and your business are one and the same with all filed on one return. File business income and losses on Schedule C (Form 1040). You may also need to pay self-employment taxes.
- Limited Liability Company (LLC): LLCs are separate legal entities. Multi-member LLCs usually file as partnerships, passing income and losses through to owners’ personal returns. LLCs can also elect to be taxed as corporations.
- Limited Partnership (LP): LPs file annual income and loss reports using Form 1065, but don’t pay federal income taxes themselves. Profits and losses pass through to partners, who report them personally. Partners receive Schedule K-1 (1065 Forms).
- C Corporation: A C Corp is a separate taxpaying entity. It pays federal income taxes, and shareholders pay taxes on dividends.
- S Corporation: An S Corp is a separate legal entity but allows income to pass through to owners’ personal tax returns.
Why Separating Business and Personal Finances Matters
Even if you’re a sole proprietor or independent contractor, keeping your business and personal finances separate simplifies tax filing. For partnerships, LLCs, C Corps, and S Corps, keeping finances separate is generally necessary for proper accounting and liability protection. Mixing funds can risk “piercing the corporate veil,” potentially exposing your personal assets to business liabilities.
Separate business and personal accounts make it easier to track expenses, reduce errors, and prepare for audits. Plus, clear records give you a better financial picture and quick access to documents if you apply for a business loan.
Many small business owners keep separate personal and business checking accounts and credit cards. This not only helps at tax time but also builds your business credit.
At Cogent Bank, we offer tools like online banking, mobile access, e-statements, and treasury management services to help you manage your accounts and business finances easily including payments, transfers, and remote deposit. These tools also simplify gathering records and preparing bank statements for taxes.
Helpful IRS Resources for Small Businesses
Personal Income Tax Help from the IRS
Schedule a Quick Tax Prep Call or Meeting
Want to learn how our treasury tools and reporting can help simplify your tax prep? We can help you switch to e-statements, separate your accounts, and get the most from Cogent Connection – our online banking platform with detailed account history, wire transfers, ACH transactions, and Check Positive Pay.
Call 888-577-0404 or visit one of our Cogent banking centers across Florida to set up your consultation today!
Disclaimer: The information contained herein is for informational/educational purposes only. The views and opinions expressed in this document may be those of the individuals and may not necessarily reflect those of Cogent Bancorp and its subsidiaries and affiliates, or the entities they may represent. Content contained herein may be used in connection with the advertising and/or marketing of products offered by Cogent Bank or Cogent Private Wealth. The material is not intended to provide or substitute for legal, tax, or financial advice or to indicate the availability or suitability of any Cogent Bank product or service. You should consult with a legal, financial, tax, or other appropriate professional(s) for your specific needs and/or objectives before making any decisions.
