Starting a small business means you’ll have
the opportunity to become your own boss and make some of your dreams come true.
It also means you’ll have to pay business taxes. For some small business owners
paying taxes turns that dream into a nightmare. There are numerous resources
you can tap into that can guide you through the completion of the tax forms if
you decide to make it a DIY project. Many business owners prefer to bring in
outside help like an accountant or tax attorney. Whichever option to choose, it
will be helpful to begin with a basic understanding of small business taxes.
What
Type of Business Are You?
Entering into a business means you have to
pick which type of business you’ll be operating as. Your choices are:
2)
Partnership
3)
Corporation
A sole proprietorship means you are the
only owner and you’re not incorporating your company. With a partnership, there
will be at least two owners (could be more) who contribute to the business. Any
profits you make in a partnership will be divided based on the rates
established in your partnership agreement. A corporation is a standalone legal
entity that is allowed to sign contracts and own property. Many business owners
choose the corporation option because it provides a level of protection for
personal assets. In other words, if your corporation is sued then only the
corporation’s assets are in play.
What
Are the Filings Dates and Forms?
As sole proprietorship business owner you
will be filing a personal income tax just as you would if you were working for
someone else. You’ll pay taxes on all your business earnings that will be
included on the T2124 Statement of Business Activities form. The fiscal year
for a sole proprietorship ends on December 31st. If you want to
select a different end of the year in fiscal terms you’ll need to use form
T1139. With the December 31st end you’ll need to file by June 15th.
With a small business partnership, the
partners will file their share of the business earnings on their individual tax
returns. The same filing deadlines as the sole proprietorship business apply.
A small business that has incorporated will
use form T2 for corporate income taxes. That form needs to be filed within six
months of the end of the business’ fiscal year. All tax forms for any type of
business need to be kept for six years.
What
Are the Earnings and Expenses?
Here’s where it gets a bit complicated.
When a business records any type of earning or expense they need to use the
Accrual Method. Translation: You’ll record revenue when you have delivered the
good or service not when you’re paid for it. Same for expenses; you record when
you incur the expense, not when you pay for it. This is why thorough record
keeping is so essential for a small business. To make a business expense
deduction, you need to prove that whatever you purchased was used exclusively
by your business. As for earnings, that is considered as any money you take in
that is a result of your business services.
