It’s nearly that time of year again: tax time. Preparing your taxes may seem like an annoying task that distracts you from running your business, but filing an accurate return can reduce the risk of paying fees and penalties down the road.
Business taxation basics
Many taxpayers don’t clearly understand how their share of business profits is taxed, and how the tax affects their personal tax liability. There are many ways you can structure your company, and that causes confusion for taxpayers.
Personal return components
Next, you need to know how your business profits impact your personal tax return (Form 1040). As explained above, income from your business can flow into your personal return in several ways, but there are three methods that are the most common.
Plan in advance
The best way to address all of these issues is to plan for your tax liability in advance. Review your tax return for the prior year, so that you understand how your tax liability was calculated. If something unusual happens during the year, such as the sale of an asset for a gain, document the transaction so that you can locate it at tax time.