Business Tax Preparation

Begin the tax computation by identifying receipts from the business activity and the accounting method that determines their year of inclusion. Gross customer collections may differ from net bank deposits because processors deduct fees or customers receive refunds. Record the gross receipts and the applicable expense or adjustment separately. Adding a payment-processor statement to ledger receipts can duplicate the same transaction.

Separate owner contributions and bona fide loan proceeds from operating revenue. Then ask whether any special inclusion rule applies to advances, canceled debt or other unusual receipts. A balanced bank reconciliation proves that cash movements have been accounted for; it does not prove that each movement has the right tax character. This page addresses that substantive treatment, while the workflow lesson covers the document-to-filing review process.

Ordinary and necessary business expenses generally require a genuine business connection, adequate records and compliance with any specific limitation. Personal spending does not become deductible because the business paid it. Mixed-use expenses need allocation. Owner draws are not automatically compensation deductions, and an inventory purchase is not necessarily a current expense if its cost belongs in ending inventory.

Amounts that acquire or improve a longer-lived asset can require capitalization and cost recovery. A bookkeeping entry labeled “equipment expense” does not select section 179, bonus depreciation or MACRS. Determine the asset, basis, business use, acquisition and placed-in-service dates, then apply the relevant cost-recovery rules. Repairs and improvements also require a facts-based distinction; a large invoice alone does not establish the tax category.

Start with book income, add book expenses that are not currently deductible for tax, subtract book income excluded from the tax measure, and adjust timing differences. For depreciation, adding back book depreciation and subtracting allowable tax depreciation makes the difference explicit. Some differences reverse in later years; others, such as certain nondeductible expenses, do not. A reconciliation should explain the direction of each adjustment, not merely force the total to match software.

For pass-through entities, separately stated items also have to leave ordinary business income while retaining their tax character. An entity-level charitable contribution may require owner-level treatment instead of reducing the ordinary-income box. Finish the substantive analysis by identifying any owner-level limitation still needed. A correct entity subtotal is not a promise that every loss or credit is immediately usable by each owner.