Small Business Tax Tips From Experts

Most people start small businesses not because they understand accounting and taxation but to follow their dreams. Many small business owners don’t feel confident handling their business finances and filing taxes, which explains these costly tax gaps and errors. Unfortunately, with the IRS threatening to increase small business audits by 50%, simple mistakes in your business taxes can attract an IRS audit.

The recent updates in taxation laws and COVID-related programs have further complicated business taxes. Even if you try to evade an IRS audit, you might be paying more taxes than you should. Below are small business tax tips from Pherrus Financial experts.

1.  Your Business Structure Matters

Unknown to most people, how you register your small business initially influences your taxes. Different business structures have varying tax implications. Common structures include:

• Sole proprietorship – This is a common business structure where the owner uses their name, social security number, and tax ID number to register the business. Here, your business won’t be taxed separately. Sole proprietors should file Schedule C together with the annual 1040 form to claim business revenue and deductions on their personal tax returns.
  
  
• Limited liability companies – Single-member limited liability companies are taxed just like sole-proprietorship, while multiple-member companies are taxed as partnerships. With partnerships, every member reports their share of the business on their personal income tax returns.
  
  
• C corporations – Also called traditional corporations, these corporations consist of directors, shareholders, officers, and employees. These corporations pay taxes at the company level. Shareholders also pay taxes on dividends received, hence double taxation.
  
  
• S corporations – Similar to C corporations, only that S corporations avoid double taxation by sharing revenue directly with the company shareholders. The firms’ shareholders then include the business income, losses, expenses, and other deductions when filing their personal tax returns.

A few business structures benefit from tax advantages more than others. Nonetheless, you should choose a structure that suits your business model.

2.  Take Advantage of Tax Deductions for Small Businesses

Small businesses can activate various tax deductions including the sole trader tax rate. to lower their total tax bill. Tax deductions ideally reduce the total income subject to federal and state tax regulations. While there are several tax deductions that small businesses can leverage, the challenge is in figuring them out.

Business expenses, such as rent, marketing costs, business meals, and others, can be excluded during taxation. However, all deductions have specific eligibility rules. For instance, business meals purchased to entertain business clients cannot be excluded, while meals for company parties are deductible. A tax professional can help small businesses identify eligible deductions.

3.  Understand Deductible Startup Costs

Starting a small business is overwhelming but expensive. Apart from recurrent costs, such as payroll, utilities, rent, marketing, and professional services, entrepreneurs also incur several one-time costs, such as website design, permits, licenses, and logo design. Fortunately, some of these startup costs are eligible for tax deductions.

The IRS permits small businesses to deduct up to $5000 in organization and startup costs. However, your total costs shouldn’t surpass $50,000. If your total startup costs are more than $50,000, your eligible deductions are reduced by the overage.

Endnote

All small businesses should pay taxes. While the amount depends on your state and chosen business structure, taxes are among the biggest business costs, with small businesses spending 19.8% of their income on taxes. You should consider working with a tax accountant if you find tax issues complicated.