home Finance Personal Finance: Filing A Tax Return For A Sole Proprietorship

Personal Finance: Filing A Tax Return For A Sole Proprietorship

Starting your own business seemed like a great idea. All the experts told you that it was the best way to improve your income. You chose wisely and picked a business that could be built easily and quickly. You even devised a way to go around the outflows so that you could cut down expenses and enhance the returns for your business. Unfortunately, no one warned you that this home business came with added complexity to your annual tax return. Now, it is time to bite the bullet. You need to file a sole proprietor tax return.

Think of a sole proprietor tax return as an individual return with extra pages.

An unincorporated business operating as a sole proprietorship is basically considered a self-employed individual. If your company grows enough to need employees, you should probably incorporate to protect you assets from lawsuits. You will still file a 1040 with either itemized or standard deductions. If you file jointly with your spouse, this will not change. The IRS allows you to designate who the business owner is on the forms that are associated with business income and self-employment taxes.

Document everything.

If you are not already doing this, start yesterday. Any expenses derived from business activity need a receipt attached if you plan to deduct them from your business income. Equipment and furniture that you would not have owned without the needs of the business can be deducted. Unless you buy really large ticket items, avoid depreciation. For large items like buildings and vehicles, follow the guidelines for allowable depreciation given by the IRS.

Start preparing your taxes early.

Stay in tax preparation mode all year long. As soon as you can put the figures together for you taxes, do so. If you can have your tax paperwork completed during January, it gives you time to find additional deductions and potential errors long before you are required to file. Just because your tax forms are finished, you do not have to immediately file. When you are confident that you will have no further changes or corrections, file your return.

Learn the meaning of: Cost of goods sold.

If you do not have an accounting background or have never been in a retail business before, this is a term that can create problems for some people. Fortunately, Schedule C instructions do give a reasonably good explanation of how to arrive at this cost. The cost of goods sold is how much it costs you to buy the goods, have them shipped, and get them sold. Schedule C is the IRS version of a Profit and Loss statement for your business.

You may have to deal with employee wages and taxes.

Unless you are an accountant, leave dealing with filing the tax forms for employees up to the professionals. In fact, if you have grown your business to need multiple employees, it is money in the bank to have a professional prepare your business taxes at this point.

Divide Schedule C deductions from Schedule A deductions.

Business deductions will all go on Schedule C. Personal deductions will all go on Schedule A. It is important to make this distinction because all business deductions come off of your business income before you have to pay the self-employment taxes on the amount. These deductions are a little less restricted as long as you can prove that they are business related and necessary. Every dollar of deductions on Schedule C saves you at least 13.3 cents of self-employment taxes plus the income taxes that are due.

Business use of a car or truck may need to be reported on Form 4562.

Some of your business car use is able to be deducted on Schedule C. However, most sole proprietors will need to file for 4562 also. Keep very accurate odometer readings, service costs, and other spending associated with using a vehicle in your business.

Be careful how you deduct business use of your home if it applies.

The IRS allows you to deduct the cost of using part of your personal residence for business use. It must be set aside for that purpose. You need to keep track of all utility bills, repairs, and other costs to prove that you spent that amount on your business space. You can deduct the same percent of your house upkeep costs as the percent of your home’s floor space that is devoted to business use.

Take on Schedule SE.

Your profit from Schedule C has to be transferred to Schedule SE. This form walks you through how to compute your self-employment tax. Take your time so that you can find your way through the farm versus non-farm income. You will need to reduce your self-employment earnings by the allowed percent. At this time it is 92.35 percent of self-employed net earnings are self-employment taxable.

You will then compute your self-employment tax at the current rate of 13.3 percent unless you make in excess of $110,100 net after the earlier reduction. Pay attention to the line numbers and formulas. At the end, you post the taxes due onto line 56 of form 1040. Most people can deduct 57.51 percent of this amount from your adjusted gross income on line 27 of form 1040. Except for the personal side, your sole proprietor tax form should be completed.


David Robson

David Robson is the founder of Complus Alliance. He has been writing about different topics for almost 10 years. He’s main focus is delivering quality insights to a wide array of audience.