Your Complete Guide to the U.S. Tax Return Definition

Tax is the money paid by citizens and businesses to the government so that they can make roads, build and maintain public parks, fund the army, provide policing, offer schooling and education, and more. 

Have you ever wondered how the U.S. government decides how much tax each individual must pay? The government’s staff don’t go knocking at everyone’s door to examine our finances and then calculate our tax duty. No, in fact, we do the job ourselves — through a tax return. 

So, what is a tax return, exactly?

This article will introduce you to the tax return definition, give an overview of its three main sections, and answer the most frequently asked questions about this financial matter. 

Tax return definition 

A tax return, also known as a tax report, is a form or a set of forms issued by the government which you fill in to report your income, expenses, and other financial information. When you complete your tax return, you’ll know if you owe any money to the government and how much to pay. In the case that you overpaid your taxes, you can also request a refund by filing the tax return. 

The tax return form for individuals for United States federal taxes is Form 1040, whereas Form 1120 is for corporations, and Form 1065 is for partnerships.

See also: What Is Tax Season And How To Prepare For Your 2022 Tax Return

The three main sections of a tax return 

Typically, a tax return consists of the following three sections: 

Income 

The income section lists all your income sources, such as wages, salaries, dividends, self-employment income, and royalties. If you’re an employee, your income will be recorded in a W-2 form provided by your employer. 

Deductions 

Deductions, also known as tax write-offs, lower your tax liability, which essentially means the more deductions you claim on your tax return, the less tax you’ll have to pay. Just be aware and make sure you only claim deductions that you’re eligible for. 

Some typical deductions for individuals that you may be able to claim are interest paid on your mortgage or your student loans, charitable donations, and contributions to your retirement saving plans. For business owners, you can claim tax deductions for most expenses involved in business operations. 

Taxpayers can either take a standard deduction or itemized deductions. For those who opt for the former method, the standard deduction for the tax year 2022 is $12,950 for single filers, $25,900 for joint filers, and $19,400 for heads of households. The deduction amount may increase slightly each year to keep up with inflation. On the other hand, if you use itemized deductions for your tax return, you choose from various individual tax deductions rather than taking a fixed deduction amount. 

Tax credits  

Many people get confused between tax deductions and tax credits, so here is the key difference: deductions are subtracted from your taxable income while credits are subtracted directly from your total tax bill. For example, a tax credit of $1,000 will result in a $1,000 reduction in your tax bill. On the other hand, a $1,000 tax deduction lowers your taxable income (the amount of money you have to pay taxes on) by $1,000. So, if you are in the 22% tax bracket, a $1,000 deduction would save you $220.

Tax credits cover a wide range of expenses and situations: you can get tax credits if you purchase solar panels for use in your home, or for child-dependent care and education credits, etc.

See more: How To File Taxes For The First Time: A Complete Guide To All Your Questions.

Who has to file a tax return? 

While most U.S. citizens and permanent residents who work in the United States need to file a tax return — not everyone must do it. Whether you have to file a tax return depends on your age, filing status, income level, and source of money.

To find out if you need to file a tax return this year, check out this detailed guideline from the IRS (Internal Revenue Service): Publication 501 (2021), Dependents, Standard Deduction, and Filing Information

What happens if I make a mistake on my tax return? 

If you filed your tax return incorrectly or failed to include something, you need to notify the IRS. To do so, you would need to file an amended return with the IRS using Form 1040-X. You can file it yourself or have a professional prepare it for you. If you don’t inform the IRS of these mistakes yourself, you could face financial penalties and pay interest. 

How can I track my refund? 

You can use the IRS Where’s My Refund? tool or call the IRS directly at 800-829-1954 to check on the status of your refund 24 hours after you e-file. The IRS will give you an exact refund date once your tax return and refund are approved.

You’ll likely receive your refunds in less than 21 days.

Final thoughts 

Understanding the definition of “tax return” and how it’s calculated will help you become more confident in dealing with this important financial process. As a result, you’ll gradually learn how to file your tax return quicker and more accurately. 

A great tip for everyone who wants to streamline their tax return filing process is to have your receipts organized. Receipts help you record transactions correctly and serve as concrete evidence for your deduction claims. It might be too much of a task to do yourself — and that’s where Shoeboxed comes in. 

Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It quickly scans and digitizes your receipts and documents, then automatically extracts, categorizes, and human-verifies important data from your receipts. On top of that, Shoeboxed also helps you manage expenses, store business cards, and track business mileage easily, helping you boost productivity and bring in more revenue. 
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Bad Spending Habits That Could Hurt Your Business

As a business owner, the challenge of how to increase profits is on your mind all the time. Improving the quality of your products and services or investing more in marketing are usually the first methods businesses think of to make more money. Yet, stopping bad spending habits is also a very effective way to grow your income. You can avoid losing money on unnecessary expenses and reallocate that cash to value-driving factors. 

This article will help identify the most common spending habits that harm your business. Hopefully, you can steer clear of them to build a healthy financial environment for your business. 

The 4 spending habits to avoid for your business  

Here are the most common spending mistakes that every business owner should be aware of:

Spending without a proper budget 

This mistake is commonly seen in newly established small businesses. They don’t think a budget is necessary when their companies only have a few financial activities. This is in fact incorrect. Not having a reasonable budget can lead to multiple painful consequences like overspending, a high chance of going into debt, a lack of savings, and less financial security. 

Additionally, when your business operates without a budget, it makes dealing with unexpected expenses, cash flow management, and meeting your financial goals way more challenging. In short, a budget allows you to allocate money more wisely, resulting in saving more money.  

If you don’t know how to make a budget yet, check out our 7-step guide to create a business budget.

Inconsistently and insufficiently recording spendings 

It’s disastrous when a business fails to record spending properly. This leads to being unable to keep good track of your expenses. You have no idea how much money was actually spent, making it impossible to determine your net profit. When you don’t have spending calculated accurately, you’re unable to evaluate your financial performance; hence no appropriate business strategies can be devised to create future growth. 

On top of that, poor spending records will guarantee that you have a miserable time when tax season comes. You’ll have no concrete data to file for tax deductions, meaning you’ll need to pay more than necessary to the IRS. That’s why you should always have your spending correctly recorded in your journals. If you don’t have enough time to do the recording, it’s best to outsource a freelancer or a professional bookkeeper.   

Another tip to avoid this bad spending habit is to keep your receipts. Every purchase goes together with a receipt. Keeping and organizing the receipts will help you better keep track of your spending and be ready to provide the IRS proof for tax deductions when required. 

Shoeboxed can help you do this with ease. Shoeboxed is a receipt scanner application that digitizes your receipts in just seconds. Your receipts will be safely stored in the cloud and easy to search whenever needed. Scanned documents from Shoeboxed are also legible and fully accepted by the IRS. 

Don’t lose money to Uncle Sam!  Get your receipts and bookkeeping records organized today! 

You might also be interested in: 7 Bookkeeping Practices Every Business Should Implement.

Not paying your purchase orders on time

Many businesses habitually pay their purchase orders as late as possible, which is fine as long as you pay them on time. This is because not paying on time can have serious consequences in the long run. The most obvious result is late payment penalties. 

While penalty costs may not be much for each purchase order if your payment is only a little late, those small penalty fees add up to hurt your profit. On top of that, late payments will severely harm your business reputation in the long run. Suppliers who may have heard about your history of late payments will be wary of doing business or offering you a good deal. 

Such problems won’t happen if you take extra care with your payment deadlines. Make sure you have the money/documents ready and processed at least a few days before the due date to have enough time to deal with any unexpected issues that arise. 

Using your personal credit card to pay for your business expenses 

Drawing a boundary between personal and professional spending can be confusing and difficult for self-employed individuals, small business owners, and freelancers. That’s why many of them end up using the same credit card for personal and corporate purposes for convenience. However, this habit may not be the best, and there are multiple reasons why. 

Using your personal credit card for business expenses will prevent you from building your business credit history. Without a good business credit history, you’ll find it challenging to apply for business loans, equipment leases, etc. because before lending you money, investors and lenders always check your business’s credit history. 

Additionally, a personal credit card has a lower credit limit than a business credit card. For that matter, your personal credit card will be of no use when you need to acquire something expensive for business purposes like machinery and equipment, office renovation, lease or rent, etc. 

Lastly, this spending habit makes your tax filing process painful. Trying to find business costs by going through your personal credit card accounts takes time, can lead to mistakes, and may even result in an audit. Keep these costs in one place – your company credit card – to make things easier for yourself.

You might also be interested in: Which Small Business Credit card is Best for Your Biz?

Want to read more about business? 

If you’re interested in entrepreneurship stories, business tips, or productivity tools, find more posts like this on the Shoeboxed Blog. Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It quickly and efficiently digitizes your receipts and documents, then automatically extracts, categorizes, and human-verifies important data from your receipts. You can scan their receipts, manage expenses, store business cards, and track business mileage easily, helping you boost productivity and bring in more revenue. 

Go paperless with Shoeboxed for FREE today! 

4 Most Used Budgeting Methods for Businesses

A budget is a crucial planning tool for every business. It estimates your future expenses, revenue, and profits. It helps you better control spending and identify situations where revenue may not be sufficient to cover expenditures. Moreover, a budget allows you to realize potential growth opportunities when you may have extra cash available to invest in new ventures.

This article will look into four different budgeting methods used widely among businesses and help you find the one that best suits your current situation and type of organization.

4 Types of budgeting methods: Which one is right for your business? 

Below are the most common types of budgeting methods that you may want to consider for your business.

Budgeting method #1: Incremental budgeting 

One of the most popular approaches is incremental budgeting. There’s no fixed formula for incremental budgeting – you simply change last year’s budget by an increment or percentage to obtain this year’s budget figure. 

This method focuses on small changes from the actual or budgeted results from the preceding period. It’s perfect when your primary cost-driving factors don’t regularly change. Without the need for complex calculations, incremental budgeting is the quickest of all budgeting methods. However, be aware that your company’s departments may overspend to avoid receiving a smaller budget the following fiscal year. It’s best to look into specific expenditures and spending habits to prevent any kinds of budgetary slack. 

Best for: Those who are limited on time but need a method that is  effective and reasonable. It’s also well-suited if you have an established business with predictable and consistent cash flow and financial activities. 

See also: How To Create a Business Budget with 7 Steps.

Budgeting method #2: Activity-based budgeting (ABB)

Activity-based budgeting (ABB) is a budgeting method in which every activity that incurs costs is tracked and analyzed to identify areas for improved cost-saving. After figuring out how to enhance cost-efficiency, a business will create a budget based on those findings. Companies typically employ this budgeting method to cut expenses, boost productivity, gain a competitive advantage, and improve overall operations efficiency. Rather than just using the past budgets to determine a new budget like the incremental budgeting method, the ABB system digs deeper into the company’s performance.

The ABB system gives you more control over the budgeting process. Since the budget uses relatively precise data for the projections, it helps managers align the budget with overall company goals much easier. Due to its complexity, the ABB method is more expensive and time-consuming to implement and maintain.

Best for: New companies without historical budgeting data should consider this method. The ABB method is also popular in major industries, like manufacturing, construction, and healthcare. Companies that are going under significant changes, such as new subsidiaries, large clients, business locations, or products, are likely to use the ABB technique as well.  

Budgeting method #3: Value proposition budgeting (VPB) 

Value proposition budgeting (VPB), or priority-based budgeting, is all about driving value. With this method, you go through every cost item to decide whether the value it brings justifies its cost. This allows your business to focus on true value drivers while avoiding wasteful spending. One of the main downsides of the VPB method is that value is not easy to determine as it depends on multiple factors like politics or economic trends. If there isn’t a clear understanding of value, business owners may make short-term decisions that negatively influence long-term goals. 

When preparing for the VPB method, businesses have to answer these essential questions:

  • Why are we spending this amount of money?
  • What value does it bring to our customers and stakeholders? 
  • Does the value outweigh the cost? 

Best for: This method best suits companies aiming to reduce unnecessary expenses and refocus on creating what customers want most. Many government entities also favor this budgeting method because it involves a lot of financial restructuring throughout the year, and VPB can help them identify which services are most valuable and most needed within the community.

See also: Are You Maximizing Your Business Budget?

Budgeting method #4: Zero-based budgeting (ZBB)

Zero-based budgeting (ZBB) is another common budgeting method. When applying the ZBB method, you assume that all department budgets are zero and must be rebuilt from scratch. In other words, past budgets’ numbers are not considered. Budget planners must justify every penny spent. The ZBB method is very strict, attempting to eliminate any expenses that do not contribute to the company’s profit. It’s difficult and time-consuming to carry out a zero-based budget, so many companies only use this approach on occasion.

Best for: This extreme budgeting method is very useful when a business has an urgent need to reduce cost, for example, a financial restructuring.  

The bottom line 

Employing a suitable budgeting method for your business is an effective way to save costs, increase productivity, and bring in more profits. 

By understanding the basics of commonly-used budgeting methods among businesses, you can gain a deeper insight into your own business’s situation to improve your financial performance. 

In order to determine your ideal budgeting method, it’s important that you have accurately recorded expenses. In order to do so, you need to have your receipts organized and stored safely.  

Shoeboxed can help you. 

Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It is a software program that quickly and efficiently digitizes your receipts and documents. This app automatically extracts, verifies, and categorizes important data from your receipts, then stores them securely in the cloud. Most importantly, scanned documents from Shoeboxed are accepted by the IRS


Go paperless with Shoeboxed for FREE today!