Sure taxes are a cost of doing business, BUT if you are smart and savvy, you will not only save on taxes but also be able to grow your business with the profit you keep in your pocket. Pro-active tax planning along with efficient operations and market leadership will ensure a smooth path on the road to success.
Small businesses are subject to numerous types of taxes and required to file an assortment that includes employment tax, excise tax, and state and local taxes, including sales tax. Smart business owners are aware there are a variety of tax deductions and credits that can lower their tax bills. Get educated on your eligibility for these below, and become knowledgeable about tax planning techniques that will also help you save.
Tax Deductions for Small Businesses Which Reduce Taxable Income
- Deductible business expenses can include wages, rent, utilities, mileage and travel expenses, office supplies, equipment, advertising, internet and wireless services, and even accountant fees. State and local taxes are generally deductible on businesses’ federal taxes as well.
- Depreciation results in tax deductions that can continue for years into the future. Under U.S. tax law, a business can take a deduction for the cost of an asset and reduce their taxable income. Rather than deduct the cost of certain property in the year of purchase, the cost of the asset can be spread out over time.
- Small businesses also often benefit from the Section 179 deduction which allows business owners to deduct the purchase price of things like equipment, software, etc., put into service during the year. In order to qualify, the equipment must be placed into service on or before December 31st. It does not have to be fully paid for in order to qualify for this deduction. A business is eligible for the deduction as long as it has enough income to absorb such a deduction.
Tax Credits Which Reduce Taxes on a Dollar-for-Dollar Basis
- The Work Opportunity Tax Credit (WOTC) provides a tax credit to businesses that hire and employ members of certain groups such as qualified veterans and public assistance recipients.
- The Employer-Provided Childcare Credit assists employers with the costs of providing or funding childcare for employees.
- The Small Business Health Care Tax Credit reimburses employers for a portion of their costs in paying health insurance premiums for their employees.
- The Qualified Small Business Payroll Tax Credit for Increasing Research Activities provides a credit based on the company’s qualified research activities.
Tax Planning and Filing
- Entity structures like sole proprietorships, partnerships, LLCs, or S-corporations offer benefits like pass-through taxation but have personal liability considerations. Larger businesses may want to operate as C-corporations, but may face double taxation at both the corporate and shareholder levels.
- Small businesses generally file taxes using Schedule C for sole proprietorships or Form 1120-S for S-corporations, and make quarterly estimated tax payments to avoid penalties and large bills at the end of the year. Large businesses and C-corporations use the more complex Form 1120 which requires more detailed reporting.
- Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more.
- All businesses except for partnerships must generally file an annual income tax return. That’s true even if they show a loss for the year and face no tax liability. Sole proprietors must file a return if their net income from the business was $400 or more, or if they’re required to file for having income over a certain amount from other sources.
- Business owners will also want to take note of the deadlines for filing their various tax forms. While individuals may only have to concern themselves with April 15th each year, businesses can face an array of deadlines. Small businesses that don’t file their taxes on time or fail to pay what they owe can be subject to IRS penalties. The IRS will charge interest on those penalties until the bill is paid in full.
Helpful Resources
Even with limited resources, small business owners should stay updated on tax law changes and compliance issues. The IRS and other taxing authorities provide numerous resources online. This IRS link would be good place to start: https://www.irs.gov/businesses/small-businesses-self-employed. Information on state and local taxes can be found on the websites of their tax and revenue departments.
If you’re a small business owner who’s either too busy with other duties or uncomfortable handling these matters on your own, consider hiring a tax professional who can assist you. Remember, fees charged by accountants that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. It may be money well spent!
