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The UPS Store Small Business blog
  • 05 April 2021
  • Jelani Markus

Small Business Tax Tips: A 2021 Tax Prep Guide

As a small business owner, tax planning can be a year-round event, considering all the record-keeping and quarterly payments you have to make to the Internal Revenue Service (IRS). Your tax-related activities will inevitably heighten during the tax season to comply with the April 15 deadline (extended to May 17 for all individual, sole-proprietor and single member LLCs). Depending on your business structure, filing your taxes can be simple (e.g., sole proprietorship) or complex (e.g., C corporation).

To avoid getting overwhelmed, gather all necessary documentation and determine whether to use online software packages or consult a professional. Follow the tips below to make the process a smoother one.

man working on a laptop at a desk

Gather Tax Preparation Details and Determine Your Business Type
Each legal entity requires a different tax form for reporting your business income and expenses.

  • Sole proprietorship. This type of small-business structure allows for an easy-to-file return since all profits go to the owner. You will need to fill out a Schedule C and attach it to your standard 1040 form.
  • Partnerships. Although these are treated in a similar fashion to sole proprietorships, the main difference is that each partner will be taxed on company profits individually based on their equity or ownership percentage. You will use Form 1065 — U.S. Return of Partnership Income.
  • LLC. If your small business is designated as a limited liability company, you will have to file an LLC return. Profits pass through the business to the members — essentially the owners — on a personal basis; they are required to pay taxes on net profits based on individual income tax rates. Note that you can elect to file your taxes like a partnership, a C corporation or an S corporation; however, you will tend to benefit from personal tax rates, which are typically lower than corporate rates.
  • C corporations. These entities pay taxes on their net income once all operating expenses have been subtracted from gross sales. Often, they may be subject to double taxation — when a C corporation pays dividends to stockholders, it pays taxes on its net profit, while its shareholders pay taxes on dividends.
  • S corporations. These corporations do not pay taxes directly. Their profits are normally passed through to the shareholders and taxed as personal income. S corporations may be suitable for small businesses. They allow stockholders, most of whom are usually active in the management of the company, to avoid double taxation.

Learn About Tax Changes for 2021
COVID-19 affected the world in dramatic and memorable ways, including how small businesses handle their tax preparation. Many tax changes introduced in 2020 will now affect your 2021 tax filing.

  • The CARES Act. During the last year, you may have become a beneficiary of the Paycheck Protection Program. This emergency loan was introduced in the Coronavirus Aid, Relief and Economic Security (CARES) Act. Billions of dollars were allocated to small businesses to help them to continue to fund payroll, rent or mortgage, and utility payments. As long as the money was used for these reasons, the loan is eligible to be forgiven. The forgiven amount is not considered taxable income in 2020 for many states.
  • Economic Injury Disaster Loan (EIDL). In an effort to help businesses affected by mandatory shutdowns and a slowed economy caused by the coronavirus pandemic, the Small Business Administration expanded EIDL. If your business is a recipient of this loan, it is considered taxable income you would be responsible for. Keep this in mind as you prepare your taxes.
  • Employee Retention Tax Credit (ERTC). If your small business was affected by COVID-19, you may have used this tax credit as a means to retain staff. For you to qualify, your business must have been closed due a government-mandated shutdown or experienced a decline in gross receipts of more than 50% for any quarter compared to the same quarter in 2019. If eligible, you would have seen tax credits up to $10,000 per employee between March 13, 2020, and January 1, 2021.
  • Families First Coronavirus Response Act (FFCRA). This assured that businesses provided sick/family leave to employees who were affected by COVID-19. If your business made these payments during the previous year, you may be eligible for 100% tax credits for the cost of the sick pay, family-leave pay, qualified healthcare plan expenses and more if they were incurred under the FFCRA.
  • Business Interest Expense Deduction Increases. The last tax-related piece under the CARES Act to be aware of is the increase for allowable business expense deductions. Previously, business entities could adjust 30% taxable income. This year, that has been increased to 50%.

Collect Your Small Business Records
You should gather all business records that report your business earnings and expenses to determine your tax deductions and credits for your business. It is simple, really: The more tax deductions you can legitimately take for operating your business, the lower your taxable profit will be. The only catch is you need to have all records of the business expenses you intend to deduct.

  • Capital expenses. You may deduct the expenses of going into business — $5,000 for the first year you are in business, with any remainder deducted in equal amounts spread over the next 15 years.
  • Auto expenses. If you use your personal vehicle for business, or your business owns one, you can deduct some of the operating costs. You can take the deduction using either the actual expense method, if you have receipts for all of your business-related expenses, or the standard mileage rate method.
  • Insurance. The IRS allows you to deduct premiums you pay for certain types of insurance coverage related to your business, including fire, flood, theft and business bad debts. Others include business vehicle insurance, life insurance covering your employees and workers' compensation insurance.
  • Travel. Business travel expenses can be deducted, such as the costs of plane fare, operating your car, taxis, meals, lodging, shipping of business materials, telephone calls, faxes, cleaning clothes and tips.
  • Taxes. Sales tax on items for your business operations is deductible as part of their cost, while excise and fuel taxes can be deducted as separate expenses. The real estate tax paid on property used for your business is deductible. State income tax is deductible, not as a business expense, but as one of the itemized deductions.
  • Education expenses. If you incur educational expenses to maintain or improve skills related to your current business, trade or occupation, you are allowed to take this deduction.
  • Interest. The interest incurred if you use credit or a personal loan to finance business purchases is deductible.
  • Professional fees. The fees you pay for professional services such as legal, accounting, tax and other consultants are deductible.
  • Advertising and promotion. You can deduct the cost of ordinary advertising, from business cards and online ads to promotional expenses that create business goodwill, such as sponsoring a football team.
  • Charitable contributions. If you operate your business as a partnership, an LLC or an S corporation, the charitable contributions you make, whether money or property, are tax deductible. You can claim the deduction on your personal return. If your business is a C corporation, the corporation will deduct the charitable contributions.
  • Moving expenses. You may deduct certain moving costs if you move because of your business. The new workplace should be at least 50 miles from your old home relative to your old workplace. Note that this deduction is technically not a business expense — it has a special spot on your 1040.

There are other business expenses you may overlook easily. As long as they are business-related and you have the necessary documentation, you may take the deduction (e.g., bank service charges, business-related magazines and books, casual labor and tips, office supplies, online computer services related to business, parking and meters, seminars and trade shows, and taxi and bus fare).

Prepare Your Documentation

Get the Right Forms
As a sole proprietorship, you can report all of your business income and expenses on Schedule C, which you should then attach to your individual income tax return. If you are the sole owner of an LLC, you may still use Schedule C. However, if you elect to treat your LLC as a corporation, then you must prepare a separate corporate tax return using Form 1120. This is not to be attached to your individual tax return.

Include Accurate Business and Personal Information
You will need to identify yourself as well as your business. You will need your Social Security number and the business entity's Employer Identification Number (EIN).

If you were employed, and your small business is done on the side, you will need Form W-2 from your employer to complete your return. If you are self-employed and performed contractual work, you will need Form 1099-MISC sent to you by those who paid for your services.

You will also need to report other miscellaneous income. Ensure you have pertinent documents for rental property income, gambling or lottery winnings, prizes and awards, scholarships and fellowships, and any other sources, depending on your income-generating activities.

While the information shared here may be thorough, it is always a good idea to seek professional assistance when preparing your taxes if you have any doubts.

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