How Businesses can Prepare for Tax Season 2023 (R-Series)

Tax season is upon us! Are you ready to ace all the forms and financial documents involved?

In collaboration with DAVO by Avalara, we’ve put together a guide to preparing your American or Canadian business for tax time to help you out.c

In this blog, we’ll cover everything you’ll need to prepare for tax time:

• Important income tax deadlines
• Tax relief and extensions
• Organizing your receipts
• Updating your bookkeeping
• Sales tax requirements
• Auditing your data with reports in Lightspeed Retail
• Potential tax deductions for businesses
• Consulting an accountant
• Submitting your tax forms

While this guide is a good jumping-off point, don’t forget to check with an accredited accountant to ensure you’ve fully covered all your tax liabilities as required by law, including deferred payroll taxes, taxes on loans and more.

Ready to get prepped for tax season? Let’s get started!

Important income tax season deadlines

American businesses

There are some tax season dates that apply to everyone—all American small businesses should have filed copies of their employee wages and non-employee compensation forms (1097, 1098, 1099, 3921, 3922, W-2 and W-2G) with the IRS by January 31. Contact your accountant for next steps if you missed the deadline. 

Generally, though, your exact filing dates for federal income taxes will differ from other businesses based on how your business is legally structured and whether you follow a calendar or fiscal year.

If your business is a partnership or an S corporation, you need to file a 2022 federal income tax return by March 15 (if you’re following a calendar year) or the 15th day of the 3rd month following the end of your tax year.

If your business is a corporation, you must file your 2022 calendar year federal income tax return by April 18, 2023. This is also the deadline for sole proprietors filing as individuals.

Contact your accountant to arrange filing of the appropriate form for your business and, if you’re following a fiscal year calendar, for your particular filing dates. 

State income tax deadlines differ from federal income tax deadlines and vary from state to state. You can find your state’s tax authority and check for applicable dates here. 

Canadian businesses

When it comes to preparing and filing your taxes for your business, be sure to keep these important dates in mind for tax season in 2023:

• All businesses must file T4 and T4A slips by February 28
• Partnerships must file their partnership information return by March 31  
• Sole proprietors and individuals usually must file their taxes by April 30. However, in 2023, you’ll have until May 1, as April 30 is a Sunday
• Self-employed business owners must file by June 15

Corporations following a fiscal calendar rather than a calendar year must file their taxes no later than six months after their fiscal year ends.

Please note, the filing deadline is not the payment deadline. Businesses must pay off their taxes for 2022 by May 1, 2023. While you may have until June to file, it’s a good idea to file sooner keeping the payment deadline in mind. 

Put simply, the key deadlines for Canadian taxes are:

When a tax due date falls on a Saturday, Sunday, or holiday recognized by the CRA, you have until the next business day to submit your taxes.

Tax relief and extensions

American businesses

You can file for a six-month extension on your federal tax return with the IRS if needed. Please note, you still must pay your taxes on time—the extension is only for filing, not paying. Contact your accountant if you need to file for an extension.

If you need an extension for your state taxes, contact your accountant. Some states recognize federal extensions, but others don’t, so it’s always best to be sure.  

You may even be able to apply for a tax payment plan. You can apply for a payment plan under these circumstances: 

• As a business, for a long term payment plan: you have filed all required returns and owe $25,000 or less
• As a sole proprietor, for a short term payment plan: you owe less than $100,000
• As a sole proprietor, for a long term payment plan: you have filed all required returns and owe $50,000 or less

Businesses and individuals impacted by natural disasters, such as hurricanes or wildfires, may qualify for extensions. Click here for more information.

Canadian businesses

In Canada, you are not able to request relief in the form of an extension for tax payments, but you can file a Request for Taxpayer Relief to cancel or waive penalties and interest fees. You will have to fill out Form RC4288, and depending on your reasons for requesting the waiver, Form RC376. 

You can request relief from penalties and interest fees if your business is suffering from financial hardships, certain actions of the CRA and extraordinary circumstances. Learn more about filing an RC4288 Form here. 

Organizing your receipts

If your business accounting is ever audited, you’ll need to have your receipts on hand. You can organize your receipts and track your business expenses yourself with file folders or you can use organizational software to store your receipts digitally.

Evernote

Evernote is a note-taking program that allows you to store information in digital notebooks. You can use it to store digital copies of your receipts, either by adding receipts on your own or through an app integrated with Evernote. 

Evernote has a free plan, but its Professional plan starts at $10.99 USD/month ($13.99 in Canada).

Shoeboxed

Shoeboxed was designed to do one thing, and it does that one thing well. With Shoeboxed, you can track your receipts digitally. Both the American IRS and Canadian CRA accept legibly scanned digital copies of receipts when auditing businesses so this program helps you stay ready and organized if the need ever arises.

Shoeboxed plans start at USD$29/month if you pay monthly.

Expensify

If you want a program that does more than just track and organize your receipts, https://www.expensify.com/pricing is an expense management system for business accounting. You can automate expense reporting, organize receipts and track mileage for any business travel you or an employee has undertaken.

Basic Expensify plans are free, but you can upgrade to premium plans starting at USD$5.00/month per user.

Updating your bookkeeping

Messy bookkeeping only hurts you come tax time. To be prepared for the 2023 tax season and beyond, you’ll want to audit your business accounting so your books are in order. 

Take the time to look over your financial records and organize all your business expenses—such as payroll, merchandise, marketing costs—by category. Ensure your categories are consistent and report any business expenses made with personal credit accounts. 

If you have no organized records of your expenses and income at all, you should strongly consider hiring an accountant to get your files in order.

Sync your bookkeeping systems

You can cut down on the time it takes to organize your financial records for tax season by syncing your accounting software and your POS system. Lightspeed Accounting creates a seamless link with systems like QuickBooks so you can be sure your sales, discounts and tax numbers are totally accurate with no chance for human entry error.

Tip: automate your inventory data by integrating your Lightspeed account with QuickBooks Online. You can sync your inventory and sales data with your accounting documents, track your expenses and mileage, set up a payroll system for your employees and create custom invoices all within QuickBooks Online. 

Sales tax requirements

American businesses

American businesses have no sales tax requirements at a federal level as sales tax laws are overseen by individual states. Most states allow for local sales tax rates in addition to state-mandated sales taxes, so your state’s tax rate may not be the sales tax rate you’re meant to be charging customers—always consult with your local tax regulations to be sure. 

If you operate a retail business in the US, you must report your sales taxes during the mandated reporting period(s) for states in which you have a sales tax nexus. 

A sales tax nexus is defined as an established presence in a state, the parameters for which vary from state to state. For some, it requires having a physical location (such as a store or a warehouse). For others, simply doing enough business in a state, such as through eCommerce, can establish a nexus. If you’re running an eCommerce business that sells over state lines, be sure to clarify with your accountant where your sales tax responsibilities begin and end.

It is crucial to note that even if your business was closed for part of the year, you still need to file $0 sales tax returns for periods where you had no sales.

To help with reporting and paying sales tax, it’s recommended that you maintain a separate bank account for the taxes you’ve collected. Doing so will help you keep track of the amount of money you owe to the government. It also put a control in place that will ensure sales tax money isn’t accidentally used to pay another business expense. It also helps prevent theft, particularly if you limit access to the account.

Keeping Records and Reporting Sales Tax

Most states will require that your business has some form of record-keeping in place, whether physical or digital. These records should keep track of every sales transaction, and note essential information like the amount of the sale, as well as the amount of sales tax you collected. Depending on the record keeping requirements of your state or locality, you may also be required to keep original copies of receipts, cash register tape, or other original sales documents.

While these requirements might seem stringent, they will help you with another common obligation: reporting on taxes. Many states require that you periodically report on the sales tax you’ve collected, in addition to actually paying that tax to the state and/or locality. Luckily, detailed records can streamline this process and prevent the likelihood of an error or discrepancy.

Automate your in-store sales taxes

Because sales tax rates and reporting requirements can vary so widely in the United States, many merchants struggle with staying on top of their sales taxes. 

You’re responsible for collecting the sales tax for every sale you make—and that means you’ll have money in the bank you can’t spend. If you’re not careful, you might have less on hand than you realized when sales tax comes due, which can land your business in arrears.

You can avoid trouble by setting up tools to help you manage your sales tax requirements. DAVO is a fully automated sales tax management system for brick and mortar merchants in both the retail and hospitality industries. DAVO connects to Lightspeed to automatically set aside sales tax funds daily, then files and pays these funds to the state when due. Once a merchant sets up DAVO, they never need to manually manage sales tax for in-store sales again.

Remitting sales taxes for delivery apps in the United States

If you’ve been using third-party delivery apps to serve your customers through takeout and delivery, you need to be aware of who is responsible for remitting sales tax to your state—you or your delivery partner. 

Each state is different and the laws have been changing. A ruling by the Supreme Court has led to many states declaring that it is the third-party app’s responsibility, not yours as the merchant, to collect and remit states sales tax. Even when this is the case, not all third-party apps pay local sales taxes. If you haven’t set up your POS correctly, you may overpay or underpay your sales taxes by not taking this into account. Review your contract with your third-party delivery partner for clarification on who is responsible for paying which taxes.

According to DAVO, once you know who is responsible for remitting sales tax, you can set up your POS to properly record sales tax in one of two ways.

If you’re responsible for remitting all sales tax:

1. Create a new order type named for each third-party delivery partner you’re working with. If you offer dine-in and takeout services, and UberEats manages your deliveries, you’d have dine-in, takeout and UberEats order services.
2. Assign your new order type the sales tax rate for your jurisdiction.
3. Create a tender type (alongside your cash and credit/debit tender types) named for your third-party delivery partner.

If your third-party delivery partner is responsible for remitting all sales tax:

1. Create a new order type named for each third-party delivery partner you’re working with. If you offer dine-in and takeout services, and UberEats manages your deliveries, you’d have dine-in, takeout and UberEats order services.
2. Assign your new order type a 0% tax rate for your jurisdiction.
3. Create a tender type (alongside your cash and credit/debit tender types) named for your third-party delivery partner.

Canadian businesses

In Canada, there are three types of sales tax: PST, GST and HST. In Quebec only, the PST is known as the QST. Which type of sales tax to charge depends on the province your business is located in. 

When collecting sales tax, remember that there are items that are taxable, like clothing and office supplies, while others, like groceries, are not. In Canada, it’s mandatory to be a sales tax registrant to charge sales tax. If your business makes over $30,000 a year, you must register with the CRA.

*These provinces have a different sales tax rate for alcohol, so be sure you’ve been charging the correct sales tax on alcohol sales in these provinces. Read more here. 

**As of December 1, 2021, personal services (such as hair services, non-medical skin care and spa services) are exempted from PST in Manitoba.

How do I know my sales tax reporting period?

Your reporting period will vary depending on the country and region(s) you sell in. 

American businesses

Your reporting period(s) will vary based on the state(s) you’re doing enough business in to have established a sales tax nexus. 

Consult the laws for the states in which you have a sales tax nexus for your reporting period(s). If you are unsure of whether or not you have a nexus in a state, consult an accountant.

Canadian businesses

Your reporting period for federal sales taxes will be assigned to you when you open a GST/HST account. Most small and medium businesses will be assigned an annual reporting period, but it is possible to be assigned quarterly or monthly reporting periods instead. 

Reporting periods for the provinces with their own PST vary depending on how much sales tax you have collected per year. The amount collected per year also changes depending on which province you are conducting your business in. You do not have PST reporting responsibilities in provinces that have harmonized the GST and PST into one rate as the HST, and you do not have PST reporting responsibilities in Alberta.

British Columbia

Manitoba

Saskatchewan

Quebec

In Quebec, QST is treated much like the federal GST/HST. Small business owners that own retail stores in Quebec will be assigned a reporting period when they register for QST.

Auditing your data with reports from Lightspeed Retail

Your Lightspeed Retail POS system (R-Series) has been gathering data on your sales, income, margins, taxes and more throughout the year. Running these reports will help you clarify your business accounting for tax season.

1. Get your overall numbers with the Totals report

The Totals report in Lightspeed Retail is exactly what it sounds like: a total of all your sales in a given period, presented to you by sale line. It also includes your cost of goods sold, margin and sales taxes. 

The Totals report does not break down your sales by tax class or location, but is useful for a quick overview of the amount of income and tax collected on all your sales. If you need a sum total of your numbers, start here.

How to run the Totals report for tax season

1. Open Lightspeed Retail. Navigate to Reports.
2. Under Point of Sale Reports > Sales & Refunds, click Totals to open the Totals report.
3. Adjust the date range to encompass your reporting period.
4. Hit search to run the report.
5. Make a note of your total taxes and income.
6. Export the report to save it.

2. Check the taxes you collected from customers with the Sales Tax report

Lightspeed Retail’s Sales Tax report returns information on taxes you’ve collected in a given period, filtered by the different sales tax parameters you set up when adding a store to your account. 

This report is useful for multi-store accounts with different taxes per store. When you run it, it calculates the breakdown of taxes paid per sales tax type. If you’re filing taxes in multiple jurisdictions, having this report on hand will give you a more useful at-a-glance overview of how much sales tax you collected than the Totals report.

How to run the Sales Tax report for tax season

1. Open Lightspeed Retail. Navigate to Reports.
2. Under Point of Sale Reports > Grouped Sales Totals, click Sales Tax to open the Sales Tax report.
3. Adjust the date range to encompass your reporting period.
4. Hit search to run the report.
5. Make a note of your sales taxes collected per sales tax rate. 
6. Export the report to save it.

3. Be sure you’re reporting the right tax classes with the Tax Class report

Lightspeed Retail’s Tax Class report breaks down the taxes you collected by class. By default, it groups all tax classes together instead of filtering them by individual sales tax rate. You can run it by location if you have different sales tax rates, or as a whole to see the distribution of tax classes across your whole business. 

This report is useful for any retailers who sell goods that, by law, have their own tax rates. For example, a jewelry store that offers its customers repairs and engraving may tax those services at a different rate. This report will return the taxes they collected on those services separately from the taxes collected on goods sold.

The difference between sales taxes and tax classes

Depending on what you sell, you may need information on both the different sales taxes you collected and the different tax classes you collected, or you may only need one.

Sales taxes can vary per location. If you have one store in Boston and one store in Dallas, you’ll need to gather different tax rates. If you’re a single-store business, you will usually only be working with one sales tax.

Tax classes, on the other hand, can vary in the same location. In some areas, regulations require retailers to charge different tax rates for items. Liquor and tobacco, for example, may be taxed differently than apparel and grocery items. Be sure to consult your local and federal regulations for any special tax classes for the goods you sell. 

How to run the Tax Class report for tax season

1. Open Lightspeed Retail. Navigate to Reports.
2. Under Point of Sale Reports > Grouped Sales Totals, click Tax Class to open the Tax Class report.
3. Adjust the date range to encompass your reporting period.
4. If you need your tax classes by sales tax location, select the store you wish to run the report on in the Shop drop-down menu. 
5. Hit search to run the report.
6. Make a note of your total taxes collected from each tax class. 
7. Export the report to save it.
8. Repeat for each store if needed.

4. Gather your eCommerce taxes with the Tax collected on eCommerce sales report 

If you need a quick breakdown of what states you may have tax liability in when you’re filing your sales taxes, you can tweak the Tax collected report in Lightspeed Analytics to give you that information in a few simple steps. 

As some states consider a sales nexus to be established after reaching a threshold of sales, running this report and seeing a high number of eCommerce sales in a particular area can let you know when it’s time to talk to an accountant about your sales nexus status there. 

Canadian provinces have their own eCommerce sales tax thresholds you should know about if you’re selling anything online in Canada. Consult your accountant to see if you owe tax in any of the provinces that appear on this report.

How to run the Taxes collected report for tax season

1. Open Lightspeed Analytics. Navigate to Sales and Inventory > Reports.
2. Under Additional reports, find the Tax collected report. Click View report.
3. Under Filters, adjust the Sale Completed Date filter to be within the range of your reporting period.
4. Find the Is Ecom (Yes/No) dimension under Sale. Add it as a filter and ensure it’s set to Yes.
5. Find the State dimension under Customer > Address again. Click it to add it as a dimension.
6. Hit Run to generate your new report.

See if you qualify for tax deductions

A deduction lowers your tax liability. When you apply a tax deduction to your income, the percentage of your income that is taxable is reduced. Tax deductions apply to various expenses that businesses incur throughout the year. 

Be sure to track your expenses year-round to make filing for tax deductions easy and fast. Contact your accountant if you feel you’re eligible for any of the deductions below.

Home office expenses

With at least occasional work-from-home a reality for many business owners, you may want to look into home office deductions. The rules differ in Canada and the United States.

American businesses

You qualify for a home office deduction if your home office is:

• Your principal place of business; or
• Sees exclusive and regular use

Exclusive use makes it hard to qualify for this deduction. If you allow your office to be used for certain personal or educational purposes, it disqualifies you, no matter how much you work in your home office. A good rule of thumb to go by is that your home office must be used in a similar manner to a regular office. This means that certain personal activities, like answering your personal phone for example, are permitted, but having your children use your office space is not. 

You must be using the space regularly to claim regular use, as only occasionally working from home disqualifies you. Principal place of business generally means you must use your home office for your administrative and management work. If you make substantial use of any other fixed location to do that work, such as a back office in your business, you’re disqualified. 

There are two ways to claim this deduction: the simplified method, where your deduction is based on the square footage of your home office, or the regular method, where you measure your home office expenses against your residence expenses. 

If you feel you qualify for this deduction, you can use Form 8829 to claim it.

Canadian businesses

The CRA is continuing to allow Canadians working from home due to COVID-19 to claim home office expenses with the Flat Rate Method. People who are working from home due to COVID-19 can use Form T777S.

This simplified way to claim expenses states that if you worked from home for more than 50% of your time due to COVID-19 or for four consecutive weeks, then you are allowed a maximum deduction of $500 for the tax year. While originally only for the 2020 tax year, the flat rate method has been extended to the 2022 tax year and does not require you to calculate the size of your workspace or keep supporting documents.

If your home office expenses exceed $500, you can use the detailed method. This method has the same requirements as the flat rate method, with the addition of calculating the size of your workspace and providing supporting documents. 

The detailed method also required two forms to be filled out: Form T2200S and Form T2200. Form T2200S is filled out by you, while Form T2200 is filled out by the employer. You will need to fill it out for any employees who worked from home and wish to claim the deduction under the detailed method.

Education

In the United States, you may qualify for a deduction if you’ve had any expenses related to education required by an employer or regulation beyond the minimum educational requirements for your present trade. Any expenses related to education that advances your professional skills but is not required to keep your professional qualifications may also qualify, as may certain trade shows and conferences. 

Canadian businesses may also write-off education expenses that are required to update or maintain your professional license or designation for your business or to keep up to date in the industry related to your retail business.

Phone and internet costs

If you conduct any business transactions or conversations through the phone or internet, you may qualify for tax deductions in both the United States and Canada. If you use the same phone for business and personal use, you can only write-off the percentage of your phone bill that you use for business purposes. 

Web hosting and online store themes 

American businesses may deduct expenses like domain registration fees from their income taxes. Web hosting and other costs may be deducted.

Whether you use your website for marketing or as an eCommerce hub, Canadian businesses may also put any payments towards a web-hosting company or online store themes on their list of tax deductions for your store.

Contractor work and salaries

American businesses may deduct salaries, contract labor, bonuses, commissions and expenses like vacation pay paid to employees from their income taxes. If you hired military veterans or other long-term unemployed people, you may be eligible to take advantage of the Work Opportunity Tax Credit. Check this article for more information.

In Canada, you may be able to write off any employees on your payroll, including contractors. You cannot claim any payments that were paid to you as the owner of the business. 

Shipping costs

The IRS accepts shipping costs in tax deductions if the expenses are both ordinary and necessary, such as a retail store paying for the shipping costs associated with their purchase orders.

According to the CRA, shipping costs associated with your business are also considered tax-deductible expenses for Canadian businesses.

If your shipping costs are related to goods you’re manufacturing yourself, you should deduct them under cost of goods and services, not as separate expenses, in both the US and Canada. Consult your accountant for guidance.

Vehicle use

In the US, business owners and self-employed workers may deduct expenses related to vehicle use for business operations, either through recording actual expenses (depreciation, gas, insurance, etc) or through the IRS’ standard mileage rate. 

In Canada, you may be allowed to write off vehicle expenses when the vehicle is being used for business purposes. You can claim parking fees, car payments, repairs, registration fees, gas, insurance and mileage. 

Keep in mind, if you use the same vehicle for personal use you will have to record mileage separately for personal and business use in both the United States and Canada. Contact your accountant for guidance.  

Equipment 

The IRS requires any equipment deducted as a business expense to be used entirely for the business. This means American businesses can usually deduct equipment such as a receipt printer connected to their POS system, but likely will not be able to deduct a printer used at home.

If your business needs a particular piece of equipment to operate, like a POS system or shopping carts, the expenses qualify as a tax deduction in Canada.

In both Canada and the US, equipment is generally deducted over several years instead of all at once.

Professional services 

You may claim professional services you attain for business reasons, including lawyers, accountants, bookkeepers and more, in both the US and Canada. 

Donated inventory

You may be able to claim donated inventory as a deductible. Be sure to collect a donation receipt from the charity you are donating to.

If your small business donated supplies, money or property to a recognized charity, you may be able to deduct them. Check the current guidelines established by the IRS or the CRA before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.

Before writing off any charitable contribution, consult your accountant.

Client and employee meals

In the US, you can take small business deductions for meals with your clients, as long as you do indeed discuss business with them, and as long as the meal occurs in a business setting and for business purposes.

Here are some tips to guide when and what you can deduct:

• For client meals and entertainment, 
• you can deduct 100% of the cost of meals from January 1, 2021 to December 31, 2022, provided that at least one employee was present and the meal was not lavish.
• You can also deduct office meals and snacks.

Reach out to an accountant with questions

If you have any questions while filing your taxes, remember that you can always trust the experts. Be sure to consult with an accredited business accountant to ensure you’ve properly filed everything.

Before you meet with your accountant, it’s a good idea to prepare a list of questions you can go over together so nothing important is missed. This list should include:

Are there any available local tax credits?

You may qualify for tax credits you don’t know about. Your accountant should be able to identify these credits for you. 

Does my business have a nexus or tax liability in other states or provinces? If so, have I handled sales taxes correctly?

This question is particularly important if you’re selling online to ensure you’re not unintentionally neglecting any sales tax responsibilities.

Are there any advantages to changing/modifying my business structure? 

As we’ve learned, not all businesses file their taxes in the same way and at the same time. You may qualify for a more favorable tax class for your business—your accountant will be able to advise you. 

How can I file taxes online?

In both Canada and the United States, you can—and should—file your taxes online.

If you’re unsure of how to go about doing that, your accountant can walk you through it using the electronic filing options for businesses in the United States or e-services for business in Canada. 

Submitting your tax forms

When it comes to filing taxes, it’s always a good idea to talk to an accountant—they’re the professionals, after all. Using accounting software will make this step go smoothly.

1. Gather all your accounting documents and fill out all the required forms
2. Remit your forms to the CRA or IRS
3. Pay any amounts due
4. File your records and receipts in a safe place in case of an audit

Once you’ve gathered your forms and consulted your accountant, it’s a simple matter of sending the documents to the right agency and paying what’s owed—that’s it. Your income taxes have been settled for the year. Time to start gathering receipts for next year’s tax season!

Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional. Where available, we have indicated the first-hand sources of the information contained in this blog post. While we strive to provide accurate content, we cannot be held responsible for any actions or omissions based on such content. Lightspeed does not undertake to complete further verifications or keep this blog post updated over time.