The small business loan application is the same as filling a college application, but instead of writing a statement of purpose, you show your business plan to the lenders and as a replacement for the CV you hand in the financial statement and tax return documents of your business. After submission, the lender will evaluate your application and decide whether you are ready for a small business loan or not.
Before we move on to the reasons why the lender is looking at your business tax return documents, let’s explore the constituents and types of the tax filing documents.
Tax filing is one of the challenging elements of running a small business. A lot of preparation is required, from the types of taxes; you suppose to pay to the total amount that goes as the tax. Apart from this, keeping track of the approaching deadlines and the entire process of arranging the documents in the right order can be frustrating. Each lending institution has a different set of required documents but the main core elements remain the same.
With various types of businesses, you have to choose a different tax form. Keep on reading, and find which type of tax form is appropriate for your business.
Tax filing for small businesses that are categorized as ‘Partnership’ is different than you being the only owner of the business and paying the tax. Let’s say you have two partners for your business, so in order to file the taxes, both of the partners have to fill in (Internal Revenue Service) IRS from 1040, separately. The reason behind filling out this form is to document the income generated through this business. Apart from this, they are required to fill out a Schedule SE. Schedule SE will allow the owners to calculate the due taxes that are imposed due to self-employment. Each partner has to pay the self-employment tax depending on the yearly profit. Lastly, all the partners have to prepare the Schedule K-1 otherwise known as form 1065. This form depicts all the profits and losses for a particular year. Both of the partners will pay the taxes depending on their profits and share in the business.
Other than these forms, you need an income statement and financial statement when you are filling your income taxes. You can share the documents to the authorities via mail or online channels. Ask your tax preparer share the tax returns with you so that you can show the documents to your potential lender. If due to any circumstances, you fail to file the taxes on time, you can ask the authorities for an extension.
Limited Liability Corporation or Sole Proprietorship
If a small business is owned by only one individual, then that business is classified as a limited-liability corporation or sole proprietorship. As there is one owner of the business, so it is easier for the business owner to file the taxes. All the data related to the tax documents will come from the personal income statement of the individual. In this scenario, you have to fill an IRS form 1040, since you have no other partners so you would be the only one filling the income tax. In addition to this, you have to fill out a Schedule C, these form documents, the P&L – Profit & Losses. Schedule C is used to pay the ‘estimated tax’ every quarter. Employers this process to pay all the medical care and social security tax along with the income tax. Mark your calendar and pay all the taxes on time as a business owner you are responsible for this task.
Internal Revenue Service acknowledges either S corporation or C Corporation while imposing the federal tax. When the business owner falls under the S corporation, the business owner does not have to file corporate income tax. The shareholders of the company pay the income tax, individually. In this way, the shareholders pay the money depending on their shares in the business.
IRS from 1120, also known as Schedule K-1 applies here! Each shareholder is obligated by the authorities to fill out this form and file the income tax. In addition to this, if IRS is receiving payments from your company on a yearly basis then, fill out the form 8109. This document contains all the information regarding the tax payments made in the past.
Basically, the owners of a C Corporation type of business are the shareholders. Later, all those shareholders select a board of governors. The board of directors or governors make valuable decisions and look over the policies of the company. The responsible personnel report to the attorney general of the state about the running financial operations and progress. A C corporation has multiple tax benefits, as compared to the LLC, the tax rate of a C corporation is significantly lower.
So, if you are a part of C Corporation, then you must fill out the IRS form 1120-A and 1120-W. So, far we have established that an 1120 form is used to document all the profit and losses. In case of any discrepancy, you can take help from the form to oversee all the deduction. In addition to this, you have to fill out the details and calculation of the unemployment tax on form 940. Not to sound like a broken record, but if you are the regular taxpayer, you can fill out the IRS form 8109 to show all the previously filed taxes to your tax collector.
Even though we have broken down the important steps of how you can pay the income tax, this process can be a little overwhelming. In order to save the self from this feeling, many small business hire professionals to document and pay their taxes. Because only when you pay the tax you will receive the tax return documents.
Now moving on to the importance of the tax return documents.
- The lenders want to have a look at your tax return documents because they want to make sure that you are able to pay back the loan on time. Only with sufficient incoming cash flow, you would be able to do that!
- In addition to this, this document will allow the lender to study all the elements that took money from your business.
- Lastly, Form 1120 and 1065 will allow the lender to know all your assets and liabilities. If the lender is not satisfied with those documents, he or she might request a detailed balance sheet.
The primary focus of the lender is to assess your capability to pay the loan on time. Make sure you are providing all the necessary information to your potential lender.
If you are preparing for a small business loan and need more information regarding the eligibility criteria, and required documents, head over to our website and find answers to your financial problems. If you have any questions, feel free to call us on our toll-free number at (833) 827-4412. You can also follow us on Twitter (@Onlinecheck) and Facebook (@Onlinecheck) for tips and tricks. We hope you get a small business loan for your small business at an affordable rate.