Does your business tax return look like it is in prehistoric, undecipherable language? It is not just you! Reading a tax return feels more torturous for many business owners than making scrambled eggs with a blindfold. Regardless, understanding your tax return could be the difference between shaky or optimal financial health for your business. So, let’s go through some details that will help you make more sense of your business tax returns.
How to Read a Business Tax Return
Reading a business tax return may seem daunting, but breaking it down into its key sections can make it manageable. Here’s a simple guide to help you understand each part:
- The Income Section
This section outlines the business’s various income sources, such as sales revenue, interest, and dividends. Reviewing this helps you gauge the company’s financial health and see if its revenue streams are diverse or if there are any unusual income sources.
- Expenses
Here, you’ll find a detailed list of your business expenses, including salaries, rent, utilities, and the cost of goods sold (COGS). Examining these lets you understand how well your business manages costs and maintains a profit margin. Comparing expenses to income reveals if the business is effectively controlling its spending.
- Deductions
Deductions are expenses that reduce the business’s taxable income. Common deductions include travel expenses, asset depreciation, and interest payments. These deductions are crucial because they can significantly lower the business’s tax bill.
- Credits
This section shows any tax credits the business qualifies for, such as hiring new employees, R&D activities, or energy-efficient practices. Tax credits help you to directly reduce the amount owed in taxes, making them more beneficial than deductions.
- Taxable Income: Calculating Your Bottom Line
Taxable income is the amount left after subtracting expenses and deductions from the total income. This figure is essential because it determines the business’s tax liability. A lower taxable income means a lower tax bill.
- Tax: Calculating The Tax Amount
Finally, this section shows the total taxes owed, calculated by applying the tax rate to the taxable income. The process reveals the business’s financial obligation to the government and indicates how well it utilizes deductions and credits to minimize its tax burden.
Understanding these sections will help you gain a clear picture of your business’s financial situation and ensure you’re taking advantage of potential tax-saving opportunities.
Bottom Line
If you approach your business tax return as a whole, you may feel overwhelmed. It is best to take it apart section by section. Making sense of just one section can set you on track to take on the next with more confidence. And if you have a tax expert who works on your taxes, feel free to ask questions about anything unclear. If you don’t, you can always rely on Tax Goddess for all things tax-related. Not to brag, but we are on our way to the 2-BILLION-DOLLAR mark in total tax savings for our clients. So, connect with us by booking a FREE CONSULTATION HERE.
