Have you started a new business and are puzzled about tacking your taxes? Go through some of the tips here to know the basic idea on what taxes needs to be paid and how to pay them. All taxes are paid differently and it all depends upon the legal status of your individual business. Sole proprietorships and partnerships report their net income on the owners’ personal tax returns. Corporations will have to file a corporate tax return.

Sole proprietors – People doing sole proprietor’s business must report their company’s net business profit (or loss) under the Self-Employment Income section of their personal tax returns.

You must report the gross and net income for your business and file either a Statement of Business Activities or a Statement of Professional Activities form. The basic difference between the two is that some professional activities may differ from other types of businesses activities.

Partnerships – Two or more individuals can have a partnership business. They are more compared with a sole proprietorship than a corporation. The partnership does not pay income tax or file a tax return. Instead each partner reports his or her share of the partnership’s net income or loss. This applies whether you received your share of the income in cash or as a credit to a capital account in the partnership.

Partners also file either a Statement of Business Activities or a Statement of Professional Activities form.

A corporation is a separate legal entity. All its business transactions are entered into and conducted separately from its owners. It therefore pays tax on the income it generates and files its own income tax return.

Corporations use the T2 return form, even if the company has zero taxes payable as in the case of non-profit organizations, tax-exempt corporations and inactive corporations. If you are not clear with this, get the full explanation on the items on the T2 return or consult the T2 Corporation Income Tax Guide (T4012).

Corporate filings are complex and assistance from a tax professional is always recommended.

• How do I calculate my net profit (or loss)?

To calculate your net profit (or loss) and complete your tax return you need to have detailed records of:

• Get all business details showing all income
• all expenses, and
• All company assets.

Next: subtract the cost of goods sold and expenses you incurred in the fiscal year (whether or not you paid them in that period) from the income you earned in that fiscal year (even if you do not receive it during this year).

This is known as the accrual method, where income and expenses are reported for the year in which work is done, regardless of whether payables and receivables for the job are actually paid in that year.

• What records do I need to keep?

If you wish to run your business more effectively, keep good records because you might need all the information of your business during auditing. You need to keep records of all income that you receive. You must also keep receipts for all of your business related expenses, including:

• receipts
• sale invoices
• purchase invoices
• vouchers
• banking information
• directors and shareholders minutes
• general ledger
• special contracts
• agreements

This entry was posted on Tuesday, January 22nd, 2008 at 6:15 pm and is filed under Personal Finance, Tax. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.