Small Business Tax Preparation
Posted Sunday, December 8, 2024
Starting and running a small business can be very challenging, but very exciting. Probably more of a pain in the butt, yet most business owners start a company to do something they love. That passion can be a great motivator, but it can also be a detractor. Proper small business tax preparation and planning, recordkeeping of your business tax deductions and money handling is a must. This is just the operational stuff- you also have to consider entity structure, exit strategies, risk mitigation, retirement planning and all that hoopla.
Basic Types of Small Business Tax Returns
Before we get too far along, there are some basics to get out of the way. You might already know all this stuff but there are others who don’t so please bear with us as we run through some small business tax preparation scenarios-
Entity | Tax Return | Form |
Trade Names, DBAs Sole Props |
Schedule C, Individual Tax Return. | 1040 |
Single Member LLC | Schedule C, Individual Tax Return. | 1040 |
Multi-Member LLC Husband and Wife |
Community Property State– Schedule C, Jointly Filed Individual Tax Return. | 1040 |
Common Law State– Partnership Tax Return. The Revenue Code is clear on this, yet most tax professionals and attorneys mess it up. It’s hard to enforce. | 1065 | |
Multi-Member LLC | Partnership Tax Return. | 1065 |
C Corp or PC | C Corporation Tax Return | 1120 |
S Corp Election | S corporations do not exist. Rather an underlying entity, such as an LLC or C Corp, elects to be taxed as an S Corp. Therefore a corporate tax return is filed. | 1120S |
The rest of this page is written for the small business owner who does not need a partnership (Form 1065) or corporate (Forms 1120 or 1120S) tax return. If you want more information on business entity tax returns, preparation fees and how it all works, please click on the button below-
LLC Tax Preparation
If you are a sole proprietor or a single-member LLC (SMLLC) without an S corporation election, your small business transactions will be reported on Schedule C of your individual tax return (Form 1040). As you might know, a single-member LLC is considered a disregarded entity, therefore it does not have a separate small business tax return- this is a common misconception. However, this is an IRS thing and you might still have a separate state filing requirement. For example, California has a franchise tax that is reported on Form 568 even if you are considered disregarded by the IRS. Texas and other states have something similar.
Our fee for this tax return preparation is typically $800 to $1,000. Where you fall in this range will depend on how much stuff you have going on. Good organization can overcome complexity… then again, being disorganized can make the simplest of small businesses seem like a full audit of Google. Either way we can help- it’s what we do all day, every day.
For example, many small business owners have a home office, yet they might also have another work location. This needs to be handled correctly to not have the home office disallowed. Automobiles? Should the company own it or should you? Mileage deduction or actual expenses? These too must be properly discussed and accounted for on your tax returns. We will also help with SEP IRA (old school) or solo 401k plan (new school) contributions calculations, and determine what the best course of action is.
If you created a limited liability company with your spouse, you can elect to be treated as a qualified joint venture only if you live in a community property state. The IRS views a multi-member LLC (MMLLC as opposed to SMLLC) as a partnership, and therefore the IRS is expecting a partnership tax return on Form 1065 and K-1s issued to the partners. Yuck. This is a huge distinction!
For small business tax preparation, click on the button below-
Small Business Tax Deductions
There are several tax deductions available to small business owners regardless if you are an LLC, partnership or an entity taxed as an S Corp. The obvious ones like printer paper and business cards are easy. But what about cell phones? What is the business use of a shared family plan? How about home offices? Business meals- is it 50% or 100%? When can a meal be 100% deducted? Spoiler alert- a pizza party for the office is 100% deductible, but if the office is just you, then No. But if the office is you and your spouse, then Yes. Boom!
Self-employed health insurance and health savings accounts (HSAs) can be tricky, and many small business owners leave money on the table by deducting these on Schedule A versus Form 1040. Schedule A has tall hurdles to allow for deducting medical expenses including health insurance premiums. This little “gotchya” could cost you several hundred dollars in taxes. Have you considered a Health Reimbursement Arrangement (HRA) or a Flexible Spending Account (FSA) for deducting dependent care benefits? Being a business owner has long hours and lousy pay- squeeze as much out of it as you can!
These are the type of things WCG will consult with you. Oftentimes the taxpayer or small business owner gets in trouble because he or she did not understand the rules. Once you know the rules and how to apply the rules, owners can take advantage of small business tax deductions without worry or concern. Please click on the button below for more information-
Self Employed 401k Plan
Once you launch your shiny new small business, you might also consider the several small business retirement plans which include solo 401k plans, profit sharing plans, cash balance and defined benefits pensions. For example, with a solo 401k plan or self employed 401k plan piggybacked with a defined benefits pension, you could sock away over $192,000 at age 50. All tax deferred if you like, which could yield a savings of over $86,000 (assuming a 45% marginal tax rate with federal and state). Wow!
Can’t contribute to a Roth IRA because you make too much? Perhaps a solo 401k plan with Roth option is your best bet with high contribution limits and no income phaseouts. Fidelity, TD Ameritrade, Schwab, etc. offer solo 401k plans, but they do not have a Roth option in the plan provision. WCG (formerly Watson CPA Group) is a 401k plan third party administrator (which means we created our own 401k plan document) that has a Roth option. In turn, the big boys at Fidelity, TD Ameritrade and Schwab will honor our 401k plan document to be the custodian of your 401k. Huh? Contact us for more information!
Note how we purposely did not mention SEP IRAs. These are old school and are usually designed to be crisis management tools (after the fact) rather than good planning tools and more product self employed retirement plans. Read more about the various self employed retirement options, including retirement tax bombs and the difference between tax deferral and tax savings below-
Tax Patrol Services
We also have Tax Patrol! This is a wonderful tax service for those who don’t need all the business advisory bells and whistles above, but from time to time want some love from an experienced tax consultant and business advisor. Have a quick tax question? Need to know the depreciation rules as you buy that new car? Wondering what your April tax bill is going to be in August? Tax Patrol is like ski patrol… you might not use it, but you sleep better knowing you have it.
A la Carte* | Keystone | Copper | Breck | |
Individual Tax Return Prep (Form 1040, joint filing) | $800 starting | |||
Business Entity Tax Return Prep (Form 1065, 1120, 1120S) | $1,500 starting | |||
Tax Planning, Tax Projection Worksheets [more] | $350 to $500 | Streamlined | Pro-Active* | Pro-Active* |
Estimated Tax Payments Calcs | Included | |||
Tax Resolution, Audit Defense [more] | NA | Add-On | Add-On | Add-On |
Complimentary Quick Chats (CQC) | $250 to $500 | Routine | Routine | Routine |
Annual Fee* | $1,500 | $2,400 | $3,360 | |
Paid Monthly | $125 | $200 | $280 | |
(prorated based on onboarding date) |
Real Estate Investors! We also have Investor Patrol Services for our real-estate minded clients who are building an empire and need tax return preparation, tax planning and comprehensive rental property related tax assistance.
*The Asterisk
Yeah, we all dislike the little asterisk. The gotcha! The fine print! Well, here is one of those situations. Pro-active and Pro-active Biz Tax Planning are different. Pro-active tax planning is limited (for individuals and households) and does not include business-entity tax planning and payments (California’s Franchise Tax, New Jersey’s BAIT, Portland’s overall madness, NYC, etc.), pass-through entity tax (PTET) calculations and payments, among other things. Not every business entity needs separate tax planning! Texas, No. California, Yes. Please see our Tax Planning Services page and Master Service Agreement for more information.
Our Telluride Business Advisory plan includes the pro-active business tax planning plus interfacing with lenders, attorneys and financial planners.
Afraid of bait and switch? Yeah, we think that stinks too. Our annual fee for Vail, as an example, is $4,500. What can make this fee go up? The most prominent reason is additional state tax returns (taxing jurisdictions). However, we will detail that in your proposal. Please see our individual and business entity tax return preparation pages for more information.
Quarterly financial statements analysis is an add-on service, however it is included automatically if you use our accounting services.
Our Way of Business
Here are some quickie FAQs to learn more about WCG CPAs & Advisors, and how we do business-
Do you extend a lot of tax returns?
Nope. We have a t-shirt that reads, “Hate extensions. Love our summers.” We file 70% of our tax returns by April 15, and only extend per the client’s request or if there is missing data such as a rogue K-1. We’ll go as quickly as you let us! Also, we don’t have A listers… we prepare tax returns in first-in first-out sequence. Sure, we leave room for emergencies or other issues that allow for jumping the line.
How is Business Advisory different than Tax Patrol or Investor Patrol?
Good question! Our Business Advisory Service plans (Vail, Telluride and Aspen) are more advisory forward like a robust old-fashioned with lots of planning, tax reduction strategies and business consultation to help you make decisions. Our Tax Patrol Services (Keystone, Copper and Breck) are more tax preparation forward like a refreshing vodka-lemonade with less tax planning, or at least less-intensive planning and consultation.
Investor Patrol Services for our rental property owners and investors is somewhere in-between since real estate is a business like any other requiring more planning, strategy and consultation but falls short of needing shareholder payroll planning and processing.
How often do we schedule meetings?
Up to you! In the past, we would pro-actively schedule quarterly meetings with all Business Advisory and Tax Patrol clients, but it was cumbersome for everyone. Today, we generally connect at least 3 times a year in a meaningful way. Once for tax return preparation, once for tax planning and then another for a myriad of reasons (“hey, I am buying a car” or “hey, we sold a rental”). This is all back-filled with emailed correspondence and touch-ups throughout the year. Having said that, with routine consultation offered above, your goal is to extract everything you need from us.
We prefer scheduled meetings over Teams. Check out our CPA Concierge Service as well. Priority boarding. HOV lane. Early check-in.
What is your communication style?
We rely heavily on emails and text message alerts. However, we do not have an allergy to the telephone. During friendly hours (let’s say 8AM to 7PM including weekends) we will usually call first if we have a question or need clarification. We are committed to responding to your email within 3 business days.
To get work chores done, the tax team responds to emails on Mondays and Thursdays only (what we call our “comms” days). Other teams such as payroll and accounting have similar email cadences.
Have an emergency or need an answer sooner? Call us! So much can be done in short order with a phone call (please keep in mind that scheduled meetings is still ideal to ensure availability and readiness).
Who will I be working with?
For tax, we have two-person teams so there is always a backup. Teams are assigned based on who first spoke with you, bandwidth and subject matter expertise. We also have accounting, payroll and business formation / governance. As such, you might have 4 people you work with. Yay! The two tax peeps, and if applicable, a payroll peep and an accounting peep (if you are using our Accounting Services team for bookkeeping + analysis). We also have dedicated Client Support and Tax Support teams to… well… support you and the other teams.
Additional Business Services
The following are additional business services to get your venture launched and on the way. Some of these are teased out separately as one and done fees like formation and onboarding stuff.
Accounting, Payroll | |
Monthly Accounting (bookkeeping + analysis) [more] | starting at $500 per month |
Bi-Monthly Accounting (bookkeeping + analysis every 2 months) | starting at $250 per month |
Quad-Monthly Accounting (bookkeeping + analysis every 4 months) | starting at $175 per month |
Annual Compliance Bookkeeping [more] | typically $1,200 annually |
Annual Accounting | starting at $1,800 annually |
Rental Property Bookkeeping [more] | starting at $1,200 annually |
Sales Tax, Personal Property Tax | typically $75 per month |
typically $150 per quarter | |
Employee Payroll (direct deposit, bi-weekly) [more] | 1 employee, $100 per month |
2-5 employees, $175 per month | |
6-10 employees, $250 per month |
Fine Print: Starting accounting service fees are based on 2 bank accounts (one checking account and one credit card is 2 accounts) with less than 250 monthly transactions. Our fee does not include the QBO subscription fee from Intuit. Custom quote is available if you have a lot going on such as third-party integrations (POS, time billing system), accrual accounting method, extensive benefits packages and / or industry specific issues (e.g, job costing in construction). The first step for Accounting Services is to do an accounting assessment with one of our experts to determine scope, service level and ultimate fee (see button below).
Even Finer Print: Employee payroll can be added only if already using our Business Advisory Service plans above (e.g, Vail). Custom quote for more than 15 employees and a referral to therapy or a script for Excedrin.
Business Formation | |
Articles of Organization or Incorporation, or Dissolution | $625 + state filing fee |
Initial Report (if required) | $125 + state filing fee |
Annual Report | $350 + state filing fee |
Employer Identification Number (EIN) | Included |
Single Member Operating Agreement (SMLLC) | Included |
MS Word Templated Bylaws Agreement (Corporations) | Included |
S Corp Election, Timely Election (made with formation) | Included |
Accountable Plan | Included |
Onboarding Fees (one and done) | |
Payroll Accounts Setup, Transfer, Closing | $550 to $650 depending on state |
Employee Data Transfer | $25 per EE, >5 |
Accounting Setup or Transfer (Fractional Controller) [more] | Varies |
QuickStart, QuickBooks Setup and Support (90 days) [more] | $750 |
S Corp Election, Timely Election (within 75 days) | $450 |
Late S Corp Election Back to January 2023 [more] | $600, $1,200 after Jan 1 2024* |
Examine Prior Tax Returns | Included |
For late S Corp elections back to January, we have a split fee of $600 or $1,200… and it depends on if we can file your S Corp by March 15. Ideally, we attach the late S Corp election to the tax return and file both electronically. Yay! Conversely, if we cannot file on March 15, we also cannot electronically extend the tax return. As such, when we file in June or July, it is now considered late. We can usually have the penalties abated, but it takes effort hence the additional $600 fee (the $600 v. $1,200). Be a hero, and get us your stuff right away to save a few bucks and trim down the anxiety.
Business Maintenance | |
Entity Relocation Package (payroll closure and opening, entity move) [more] | $800 (some are $1,050) + state filing fees |
Address Changes w/o Payroll (IRS, State Dept of Revenue, Secretary of State) | $250 + state filing fees |
Address Changes with Payroll (above + state and local payroll agencies) | $350 to $450 + state filing fees |
Our entity relocation package includes closing your current payroll accounts, opening shiny new ones, moving your entity with the Secretary of State (if applicable) and updating addresses as necessary.
Speaking of address changes… these are tough. Basic address changes require IRS, State Department of Revenue and Secretary of State notifications. Address changes that include payroll add another level of complexity since departments of revenue are not the same as departments of labor, and there might be local or municipal agencies as well.
Advisory Services Fine Print
A la Carte
A la Carte fee ranges are approximates. 80% of our clients fit into our published fees, but there are outliers. We have a handful of clients with over 30 rentals; their individual tax return is north of $4,000. We also are assuming one state; if your business spans the galaxy then additional fees will be discussed with you prior to payroll setup or tax return preparation. Typically, each state or tax jurisdiction is around $250 to $350 for tax preparation since it affects both your business and individual tax returns (frankly, state apportionment is a pain in the butt, but it is our pain… and states, especially California and New York, are crazy about it).
Prorated Fees
Some more things to consider- when a partial year remains, our usual annual fee is decremented to not charge you for services you didn’t use such as payroll processing. However, a large chunk of our annual fee is tax return preparation which is typically a built-in fixed amount of $2,300 (both business entity and individual tax returns) plus annual tax planning. Whether we onboard you in January, July or December, we have to prepare a full year tax return. This increases the monthly fee for the remaining months of 2024 but the monthly fee will later decrease in January of 2025 to reflect the amounts above. Yeah, we make it sound like 2025 is just around the corner.
Payroll Processing
We make very little profits on payroll processing… we offer it as a convenience to our clients. One throat to choke with a single call can be reassuring but if you want to run your payroll, go for it! Everyone thinks payroll is a piece of cake; write a check and done. Nope… we see a lot of mistakes being made by small business owners especially the handling of self-employed health insurance and HSA contributions since there are special rules for greater than 2% S Corp shareholders. Then again, we don’t mind fixing what was broken.
Tax Returns
You can prepare your own individual tax return as well… but the benefit WCG preparing both individual and business tax returns is that can we slide things around depending on income limitations, phaseouts, alternative minimum tax (AMT), Section 199A deduction optimization, pass-through entity tax deductions (PTET), etc. Having our arms around both worlds can yield some good tax savings!
Note: An individual tax return is what the IRS calls Form 1040 and refers to the entity filing the tax return (you, the individual, are the entity). However, a married couple are deemed to be one entity for the sake of an individual tax return. So, when we say we will prepare your individual tax return, it is meant to include your spouse in a jointly filed happy happy joy joy tax return.
Break-Even Analysis (does an S Corp make sense?)
Break-even analysis is based on our annual fee of $4,500 for our Vail package. If an S corporation saves you 8% to 10% (on average) in taxes over the garden-variety LLC, then $4,500 divided by 9% equals $50,000 of net ordinary business income (profit) after expenses and deductions.
This doesn’t factor in the lower audit rate of S Corps versus Schedule C activities, plus the ability to use business funds to pay for your state income taxes otherwise known as the Pass-Thru Entity Tax Deduction (PTET) or the great SALT workaround.
More sales pitch! Keep in mind that our fee of $4,500 includes your individual tax return which you might already be paying another tax professional to prepare. WCG CPAs & Advisors has a handful of clients who are right at the break-even point of $50,000 but leverage an S Corp and our services to get tax return preparation, tax planning and consultation.
No BS
We are not salespeople. We are not putting lipstick on a pig, and trying to convince you to love it, even if Tom Ford’s Wild Ginger looks amazing. Our job remains being professionally detached, giving you information and letting you decide.
Moreover, many CPAs and tax professionals thrust their risk aversion onto their clients. This is bad. At WCG CPAs & Advisors we must perform our due diligence and hurdle our ethical and professional standards. However, after those gymnastics we present a risk-based analysis to the tax return and let you, the client and taxpayer, decide how to proceed. Having said that, we don’t entertain tax scammers or those who can take down the ship. Arthur Anderson anyone? No thanks.
We also see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. Just because you can complicate the crap out of your life doesn’t mean you must. Just like Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea.
Next Steps
Here is a brief summary of the next steps should you want to engage WCG with Business Advisory Services or Tax Patrol-
1. We schedule an appointment to discuss your needs and ensure that we have the proper resources to help you.
2. We draft a proposal outlining the scope of services and our fixed annual fee.
3. If necessary, we schedule another appointment to review the proposal and perhaps tighten things up or make changes.
4. Once the proposal is signed, the fun begins with onboarding. We have an extensive checklist and internal task list to properly onboard you and your business. Some things are concurrent (such as gathering housekeeping docs and setting up payroll) and some things are sequential (for example, collecting financial data and then offering salary recommendations and creating a tax plan). Onboarding is like having a baby; a SWAT team shows up and does a zillion things, and poof, everyone is gone except for mom and baby.
5. After onboarding (usually 4-6 weeks), things settle down into a rhythm- Tax preparation in the spring, tax planning in the summer, with payroll and routine consultation bouncing along throughout the year.
Our Business Expertise
As mentioned elsewhere we primarily focus on small business owners and their unique consultation and tax preparation needs. With over 60 full-time consultation professionals including Certified Public Accountants, Enrolled Agents and Certified Financial Planners on your team, WCG CPAs & Advisors consults on custom business structures, multiple entity arrangements, S corp elections (even late S corp elections back to January), tax strategies, business coaching, industry analysis, executive benefits, retirement planning including individual 401k plans, exit strategies, business valuations, income tax planning and modeling, and tax representation.
We also work with business law attorneys for business owners who have additional needs such as drafting Operating Agreements, fee for service contracts, buying or selling a business including employee stock ownership plans and partner buy-ins. In addition, WCG coordinates with third party plan administrators create age-based profit sharing plans and cash balance (defined benefit) plans. We can run point on whatever your business needs to ensure that communication is effective and efficient allowing you to sell widgets.
Here are some additional resources you might find useful.
WCG CPAs & Advisors is a full-service yet boutique progressive tax, accounting and business consultation firm located in Colorado serving clients worldwide.
Business Consultation
Do you have questions about small business tax preparation? What about S Corp vs LLC and the what that means? Let’s chat!
Record Keeping
Keeping accurate records is actually pretty easy, especially if you have a dedicated checking account for the business. Two elements are required to meet IRS standards- a written log or record of the business purpose, and evidence of the amount paid, date and to whom. Bank account or credit card statements in conjunction with financial or accounting software such as Money, Quicken, QuickBooks and Xero will cover most of your business expenditures. A trip to WalMart or Home Depot would probably require a detailed receipt since you can buy paper and diapers at a WalMart. Read more about proper small business recordkeeping here-
Money Handling
The biggest and most repeated mistake that small business owners commit is to spend company funds on personal items. Do not pay the house mortgage with your business checkbook! Write a check to yourself (or make a transfer), and then write the mortgage check. Items such as gas for your car seem business related- unless the vehicle is 100% business use and owned (and titled) in the business name, then it becomes a mixed use vehicle, and the gas purchase should be handled the same way as the mortgage check. Then, you turn in expense reimbursements to your company for the expense. This is called an Accountable Plan- contact us for more details.
Hobby Versus Business
Is your business really a hobby? There several step by step criteria that the IRS and Tax Courts will use to determine if you have a genuine profit motive, or if you are just playing around with your business. There is no hard and fast rule such as the ubiquitous three years of consecutive losses rule. Recently the Tax Court upheld a track coach’s eight years of consecutive losses as a legitimate business. Read more about hobbies here-
Business Coach, Advisors, Consultants, et al
WCG can also help you with business decisions such as marketing, hiring and training a staff, logistics, supply chain, and other issues that entrepreneurs face every day. We also have experience with business acquisitions, valuation, SBA loans and lending, and designing exit strategies. Most business owners don’t think about exit strategies, but this becomes critical when getting involved with another partner.
Other things to consider are expense reimbursements, liability issues, retirement plans including annuities, life insurance, key person insurance, defined benefits plans, death clauses, divorce clauses, long-term care, health insurance, etc. Schedule a consult today!
We are your Colorado Springs Accountants, and your Denver Accountants too. We look forward to working with you! And even if you don’t live in Colorado, we can still provide excellent service through modern technology and our client portal. Over 80% of our clients are outside Colorado! Weird, but that’s the way we’ve grown. If you live somewhere really cool like Santa Barbara or New York, our team is more than willing to travel. Even Chicago has its moments.