Taxes are one of the most significant expenses a small business owner will face. Understanding your tax obligations is essential for filing accurately and making timely payments.
There are several things to know about small business tax preparation, including what forms you need, which deductions you can claim and when to file them. This article explains these basics so you can jump-start the process.
Taxes
Taxes are an integral part of running a small business. Businesses must pay income, self-employment, excise, and property taxes at the federal and local levels.
While they can be daunting, understanding taxes and how they affect small business tax preparation is critical to getting the job done right. Suppose you need to learn how to navigate the complexities of taxation. In that case, you can hire accounting professionals or enroll in courses and programs that teach you how to handle this essential aspect of your business.
Keeping up with tax code changes is crucial for new and experienced tax preparers. Whether you’re filing taxes or using a certified public accountant, staying up-to-date on the latest regulations and payment requirements is important.
Business Structure
Before you start filing small business tax returns, it’s important to understand your business structure. It will affect many aspects of your small business, including your tax liability and how you report your business income and expenses.
The proper structure for your business depends on your state’s legal and tax requirements and your personal needs and goals. A business attorney or accountant can provide guidance about which structure will work best for your company.
For example, an LLC may offer some protection from personal liabilities, while a corporation offers more robust liability protection. However, choosing a business structure that doesn’t fit your personal goals can negatively affect your company and you.
Your business’s legal structure also determines how much money you must pay in taxes and fees and how the government can enforce compliance obligations. Some states require fines, suspension or administrative dissolution (the forced closure of a business) if a company violates its tax and legal obligations.
Deductions
One of the most important aspects of small business tax preparation is knowing what deductions you can take. These write-offs allow you to subtract the cost of an expense from your taxable income, reducing the amount of money you owe the IRS.
Deductions come in many forms and are not necessarily all related to your business. Some are more personal than others, and it’s best to consult an experienced accountant for guidance on what is and isn’t deductible.
For instance, a home office is eligible for a deduction as long as it is regularly and solely used for your business activities. You can also take a deduction for advertising expenses.
Aside from deductions, you may also be eligible for tax credits. These can reduce the amount of taxes you owe or increase your tax refund.
Tax Payments
Small businesses must pay several types of taxes, depending on the type of business entity they have. These include income tax, self-employment (SE) tax and payroll taxes.
The tax rates you pay depend on your business structure and the profit you make in a year. For example, C corporations have paid federal income tax at a flat rate of 21% since the Tax Cuts and Jobs Act was passed in 2018.
In addition to paying taxes at the federal level, small businesses may also be responsible for local taxes if they have property or sell goods or services. This can vary significantly from state to state, so keeping accurate records and tracking sales and transactions is important.
The best way to reduce your tax liability is to maximize your deductions. This can be tricky, but with the help of a professional accountant or CPA, you can claim many items that are eligible for a tax write-off.
