5 Things to Consider when Purchasing Small Business Tax Software

Whether you are a small sole-proprietor working out of your garage selling items online, or your small business has grown and now you have incorporated or formed a partnership, an awareness of your business tax software needs gives you flexibility and assurance of knowing your tax concerns are addressed.

Like any tax package, a good software program will guide you through your form preparation, check the submission for accuracy, prompt you for possible deductions and make a log of reports that can be carried forward from year to year.

With that in mind, here are five things to consider when choosing an appropriate business tax software package.

1. What forms does the software accommodate?

A sole proprietor who does not have employees likely uses their 1040 to report net self-employment earnings and business tax deductions on a related Schedule C or a Schedule E. Most basic packages will have these forms, as well as the Schedule SE to report self-employment tax.

Many small businesses require a larger scope of forms, such as the various 1120 forms used to report earnings of a corporation. Other forms to consider include Form 4562 - Depreciation and Amortization, Form 4797 - Sale of Business Property, Form 8829 - Expenses for Business Use of Your Home, and Form 7004, which is used to request an extension to file most business tax returns.

2. Do you have any employees or subcontractors?

If you are employing individuals to work with you or under you, you need to consider the additional reporting responsibilities of having employees or subcontractors. Federal tax withholding is required to be reported to the IRS on a quarterly basis using Form 941 and 940. Year end reporting needs to be made as well using a W-2 or a 1099-MISC.

Additionally, check to see if your software package supports federal tax depositing for your employees or estimated tax payments for your business.

3. How much of an investment do you want to make?

If you are looking for assistance only with filing your current year business tax returns, then you can likely pay a fee and use a service that is available online. You may be able to locate a free, one-time use program as well; however this may lack vendor support or comprehensive updates that you require.

Keeping in mind that any larger purchase is a tax deduction, you may want to consider a software package that will carry over from year to year. Packages that allow for business tax filing, bookkeeping, tracking of profit and loss, tax deductions and employee reporting may be expensive at the outset, but can pay for themselves over the long run.

4. Does the software easily integrate with any existing programs you are using?

Unless you want to recreate records you already have, check or ask how easily the software may work with existing applications you are already using. If you are using Quicken or Quickbooks to keep records, will you be able to import the information to use for tax purposes? Microsoft Excel is a format that many businesses use to track everything from purchases to inventory to expenses. Make sure your software package accepts the same extensions (xls or csv).

5. What kind of file back-up or storage capacity does the software offer?

Being able to back up your information is essential when thinking of the long-term sustainability of your business. A loss of records can be catastrophic, especially when it comes to an IRS business audit or a legal concern. Local back-up is not enough. A flood, fire, theft or other disaster won't protect your records. Check to see if the software company offers remote back-up or storage.