Tax Preparation Checklist for Small Businesses

Getting Tax-Ready: Start Early

The biggest mistake small business owners make is waiting until April to think about taxes. Starting preparation in January (or better yet, maintaining tax-readiness year-round) provides several advantages:

Better deduction tracking: You're less likely to miss deductions when you track them throughout the year.

Lower accounting fees: Accountants charge premium rates during tax season. Organized clients also require less billable time.

Cash flow planning: Early preparation lets you plan for tax payments rather than scrambling for cash at the deadline.

Time to fix problems: If you discover issues early, you have time to correct them properly.

Less stress: Spreading the work over weeks instead of cramming into days makes the process manageable.

Essential Documents Checklist

Income Documentation

Gather all documentation showing business income:

1099-NEC forms (from clients who paid you $600+)
1099-K forms (from payment processors like PayPal, Stripe)
Invoice records for all income
Bank statements showing deposits

Sales reports from e-commerce platforms
Point-of-sale system reports
Inventory records (beginning and ending)
Cost of goods sold documentation

Interest income (1099-INT)
Dividend income (1099-DIV)
Sale of business assets or property (1099-S)
Any other income sources

Expense Records

Comprehensive expense documentation is critical for maximizing deductions:

Rent or mortgage interest (office/retail space)
Utilities (electric, water, internet, phone)
Insurance premiums (liability, property, professional)
Office supplies and equipment
Software and subscriptions
Professional services (legal, accounting, consulting)
Marketing and advertising costs
Bank fees and credit card processing fees

W-2s for employees
1099-NEC forms for contractors
Payroll tax records
Health insurance premiums
Retirement plan contributions
Employee benefits costs

Mileage logs (if claiming standard mileage)
Fuel, maintenance, insurance receipts (if claiming actual expenses)
Hotel receipts
Airfare and transportation
Meal receipts with business purpose documented

Mortgage interest or rent (proportionate)
Property taxes (proportionate)
Utilities (proportionate)
Home insurance (proportionate)
Maintenance and repairs (proportionate)
Square footage documentation

Financial Statements

Your accountant will need these reports:

Profit & Loss Statement (Income Statement): Shows revenue and expenses for the year.

Balance Sheet: Shows assets, liabilities, and equity at year-end.

Cash Flow Statement: Shows how cash moved in and out of the business.

Bank Reconciliations: Proving all transactions are accounted for.

Credit Card Statements: Showing business purchases.

Loan Documents: For any business loans (showing principal vs interest).

Common Tax Deductions for Small Businesses

Don't leave money on the table. Here are deductions many small businesses miss:

Home Office Deduction

Eligibility: You must use a portion of your home regularly and exclusively for business.

Simplified method: $5 per square foot (max 300 sq ft = $1,500)
Regular method: Calculate actual expenses × (office sq ft / total home sq ft)

What you can deduct: Mortgage interest, property tax, insurance, utilities, repairs, depreciation (proportionate to office space).

Vehicle Expenses

Two methods—choose the one that gives the larger deduction:

Track all business miles
Multiply by IRS standard rate
Simpler but may yield smaller deduction

Track all vehicle expenses (gas, insurance, maintenance, depreciation)
Calculate business use percentage
Deduct that percentage of total expenses
More work but often larger deduction

Required: Detailed mileage log showing date, destination, business purpose, and miles.

Section 179 Deduction

Allows immediate expensing of equipment purchases rather than depreciating over years.

Up to $1,220,000 in equipment deductions
Phase-out begins at $3,050,000 in purchases

Eligible items: Computers, office furniture, machinery, vehicles (with limits), software.

Strategy: If you're buying equipment anyway, purchasing before year-end can reduce current year taxes.

Other Common Deductions

Startup costs: Up to $5,000 in year one
Health insurance premiums: Self-employed can deduct premiums
Retirement contributions: SEP IRA, Solo 401(k) contributions
Education: Courses and materials improving business skills
Meals: 50% of business meals (100% for certain 2021-2022 meals)
Bad debts: Uncollectible invoices (if using accrual accounting)
Depreciation: For assets with multi-year useful life

Reconciliation Before Tax Time

Before sending anything to your accountant, reconcile everything:

Bank Reconciliation

Monthly reconciliations: Compare your books to bank statements for every month.

Missing transactions
Duplicate entries
Uncategorized transactions
Personal expenses mixed with business

Credit Card Reconciliation

Recorded in your books
Properly categorized
Has receipt documentation
Noted with business purpose if required

Accounts Receivable/Payable

Review outstanding invoices: Determine which are collectible vs. bad debt.

Review outstanding bills: Ensure all 2025 expenses are recorded even if not yet paid (accrual accounting).

Inventory Reconciliation (Product Businesses)

Count all inventory on hand December 31
Value inventory (cost or market value, whichever is lower)
Adjust books to match physical count

Working with Your Accountant

What to Prepare

Send your accountant:

Profit & Loss statement
Balance sheet
General ledger
Bank/credit card reconciliations

All 1099 forms
Sales reports
Other income records

Categorized expense reports
Receipt files (organized by category)
Mileage logs
Large purchase invoices

Prior year tax return: Especially if this is a new accountant.

Questions or concerns: List any unusual transactions or situations.

Questions to Ask Your Accountant

Maximize value by asking:

"What tax-saving strategies should I implement for next year?"
"Should I adjust my quarterly estimated payments?"
"Am I in the right business entity structure for tax purposes?"
"Are there retirement plan options that would reduce my taxes?"

"Am I missing any deductions?"
"Should I use standard mileage or actual expenses?"
"Does a home office deduction make sense for me?"

"Do I need to make any estimated tax payments?"
"Are there any filing requirements I'm missing?"
"Should I be collecting sales tax in any states?"

"How much should I set aside for taxes this year?"
"Would it make sense to buy equipment before year-end?"
"Should I switch from cash to accrual accounting (or vice versa)?"

Tax Filing Deadlines

Missing deadlines triggers penalties and interest. Know your dates:

For Different Business Entities

April 15: Schedule C filed with personal return (Form 1040)
Quarterly estimated taxes: April 15, June 15, Sept 15, Jan 15

March 15: Form 1065 due
Quarterly estimated taxes: April 15, June 15, Sept 15, Jan 15

March 15: Form 1120-S due
Quarterly estimated taxes: April 15, June 15, Sept 15, Jan 15

April 15: Form 1120 due (if calendar year)
Quarterly estimated taxes: April 15, June 15, Sept 15, Dec 15

Extensions: File Form 7004 (businesses) or Form 4868 (individuals) by the original deadline. Extensions give extra time to file but NOT extra time to pay—you must estimate and pay taxes owed by the original deadline.

Other Important Deadlines

January 31: Deadline to send W-2s to employees and 1099s to contractors.

Quarterly estimated taxes: If you expect to owe $1,000+ in taxes, make quarterly payments.

State and local deadlines: May differ from federal; check your state requirements.

Year-Round Tax Planning Tips

Make next year easier with these habits:

Keep Personal and Business Separate

Dedicated business bank account
Business credit card
Never mix personal and business expenses
Pay yourself properly (salary or distribution, not random transfers)

Track Everything in Real-Time

Enter transactions weekly (not at year-end)
Photograph receipts immediately
Note business purpose for meals, travel, gifts
Maintain contemporaneous mileage logs

Set Aside Money for Taxes

Self-employed: Save 25-30% of net income for taxes (federal, state, self-employment tax).

Consider a separate savings account: Transfer your tax percentage from each payment received.

Make Estimated Tax Payments

Calculate quarterly amounts with your accountant
Set up quarterly payment reminders
Underpayment penalties apply if you don't pay enough

Review Quarterly

Review Profit & Loss statement
Check you're on track for annual goals
Assess if estimated tax payments need adjustment
Identify potential tax planning opportunities

Maximize Retirement Contributions

SEP IRA: Contribute up to 25% of net self-employment income
Solo 401(k): Contribute up to $69,000 (2025, verify current limit)
Contributions reduce taxable income
Deadline: Tax filing deadline (including extensions)

Red Flags That Trigger Audits

Avoid these audit triggers or be prepared to document thoroughly:

High Deductions Relative to Income

Claiming significantly higher deductions than similar businesses raises flags. Be ready to substantiate.

Cash-Heavy Businesses

Cash businesses (restaurants, salons, retail) face extra scrutiny. Immaculate records are essential.

100% Business Use of Vehicle

Claiming 100% business use of a vehicle is rare and scrutinized. Be honest about personal use.

Round Numbers Everywhere

All expenses in round numbers ($500, $1,000) suggests estimation rather than actual tracking.

Consistently Reporting Losses

Hobby loss rules apply if you report losses year after year. Show profit motive and business-like operation.

Home Office for Employees

W-2 employees can no longer deduct home office (2018 tax law change). Only self-employed can claim this.

Excessive Meals and Entertainment

Claiming meals for every day raises questions. Document business purpose and attendees.

Misclassifying Employees as Contractors

IRS aggressively pursues misclassification. Understand the difference and classify correctly.

Final Checklist Before Filing

Use this final checklist before submitting your return:

[ ] All income sources documented
[ ] All 1099s and W-2s received and matched to records
[ ] Bank and credit card statements reconciled
[ ] All expenses categorized and documented
[ ] Receipt files organized and accessible
[ ] Mileage logs complete and detailed
[ ] Large purchases properly categorized (asset vs expense)
[ ] Home office square footage calculated
[ ] Estimated tax payments recorded
[ ] Prior year tax return available for reference
[ ] Questions for accountant documented
[ ] Next year's tax planning strategies discussed

The Bottom Line

Tax preparation doesn't have to be overwhelming. The key is treating it as a year-round process rather than an annual crisis. With organized records, proper documentation, and early preparation, you can:

1. Maximize legitimate deductions 2. Minimize accountant fees 3. Reduce audit risk 4. Avoid penalties and interest 5. Make strategic tax planning decisions

Start today: Set up a system to track income and expenses throughout the year. Your future self—and your bank account—will thank you every April.

Remember: The goal isn't to avoid paying taxes. It's to pay exactly what you owe—no more, no less—while staying completely compliant with tax laws. Good recordkeeping makes that possible.