For many expats, nothing is more rewarding than being a business owner. While being an expat entrepreneur has many rewards, it comes with unique challenges. In particular, tax time can be a headache. Fortunately, putting the right record-keeping in place makes it easy to locate essential documents and prepare your small business tax return.
For many small business owners living abroad, their primary focus is selling their product or services and taking care of the client. Many business owners neglect the backend part, such as record-keeping, tracking revenue, and tracking expenses.
However, at tax time, this is a serious headache because you must know how the business performed to prepare an annual income tax return. Without documentation to support expenses, then no tax deductions are allowed. So the big question is: what tax documents do you need for your small business?
Small Business Tax Documents 101
The IRS does not have set requirements for what tax documents you must keep for your small business. The only condition that they have is that you must keep records to verify how you calculated your revenue and documents to support deductions claimed on the return.
The IRS does have some best practices and recommendations on how you should keep tax records for your small business, and we will share those best practices below.
Record-keeping Best Practices for Small Business Owners
1. Separate business finances from personal finances.
The easiest way to do this is to open a bank account for the business and only use it for business transactions. In this account, you should deposit revenues from customers and money that you invest in the company.
2. Use your business bank account or line of credit to pay for business expenses.
Use your business bank account to pay for expenses. Alternatively, you could also establish a credit card for the company and use it for business-related expenses solely.
3. Track expenses internally because you can’t rely on financial statements alone.
The statements from the financial institution are only a tracking tool used to simplified record-keeping. They can’t be relied upon exclusively to establish income and expenses.
Tax Documents Needed for Small Business Reporting
1. Every business must track revenues, also known as “gross receipts.”
Supporting documentation for gross receipts are cash register receipts, bank deposits, sales receipts books, invoices, and credit card receipts.
For an independent contractor that works for US-based organizations, you can use Form 1099-MISC. A 1099-MISC will only be issued for payments exceeding 600 USD and shouldn’t be relied upon solely. The important thing is that you maintain records of payments you receive from your customers.
2. You must also track expenses, particularly the ones you want to deduct.
The records that you need for business expenses depend on the type of deduction you are claiming.
For items that you purchase for the business, this is rather simple. You can use canceled checks, cash register tapes, account statements, credit card slips, and invoices.
For deductions in which the IRS provides special deductions such as mileage and meals, then you should maintain a logbook that shows dates, who you met, where you went, and the miles driven.
Documenting Travel Deductions
Deciding which travel deductions apply to expats can be extra tricky. To know which travel expenses are deductible, by definition, they have to occur outside of your tax home.
Further, depending on the type of business you own, ordinary and necessary expenses directly related to business travel may apply. So, if you have an entertainment business, travel expenses are more likely to be deductible if traveling is directly related.
Finding the Best Filing System for Your Small Business Tax Documents
Accounting software for small businesses
To simplify the accounting process, you could use accounting software that can link to your bank account, credit cards, and other financial accounts to help you generate reports. The reports can be used to create useful statements that can assist with preparing your income tax return.
Hiring an accounting professional
You could also choose to hire a professional to help you manage tax documents for your small business. Regardless of what method you select, you must use still have documents to back up income and expenses.
Create a system that works for you
If you do only one thing, do this: create a system that makes it simple for you to track your business activities and maintain tax documents to support these items.
The more often that you review your records, the more comfortable the process, so it suggested that you look at your account once a month.
Greenback Makes Taxes for Small Business Owners Simple
Greenback’s accountants know the ins and outs of filing a small business tax return as an expat living abroad. On top of being expats themselves, they’ve spent years gaining experience and expertise in expatriate taxation for individuals and business owners.
While many accounting firms offer a wide array of tax services, Greenback focuses exclusively on tax services for expats. When you decide to work with us, we pair you with an accountant who has experience with your particular situation and knows all the best ways to help you simplify and save on your taxes.
Learn more about our Small Business Tax Return services.
Ready to meet your accountant and start filing your business taxes? Get started today.