Tax Basics for Small Business

As an entrepreneur, you’ve probably built your business with a healthy dose of passion. But you might not be passionate about all of the required financial obligations, especially paying taxes. We’ve compiled information to help you understand the various types of taxes you might be responsible for along with tax credits and deductions. It’s a smart idea to work with an accountant or other financial professional familiar with small business taxes so you won’t face fines or other penalties.

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What is Your Business Structure?

Your business structure determines the taxes you pay. Your legal structure can even impact your ability to secure a business loan or attract investors. Choose your structure wisely, the right one can even lower your personal risk if you get into legal hot water.

Here are the 6 most common business entities and taxes you might be responsible for. Every business is unique so consult with a tax professional before you file to avoid fines or other penalties.

Sole proprietorship

The main difference between reporting income from your sole proprietorship and reporting income from a job is that you list business income and losses on Schedule C. Submit this form to the IRS along with Form 1040.

General partnership

General partnerships do not pay income tax. However, the owners or partners of a general partnership do. Partnerships are pass-through tax entities meaning profits and losses of a partnership trickle down to the business' owners. Those profits and losses must be declared on their share of the business' income on their personal tax returns. This avoids tax issues like double taxation of income. The business needs to file Form 1065. General partnerships do not have to pay an annual tax like limited partnerships.

Limited partnership

Limited partnerships have a tax advantage over general partnerships. Partners in a limited partnership have limited personal liability for debts of fellow partners, as long as they are not directly involved in management. In certain states, like California, limited partnerships are responsible for an annual tax of $800.

Limited liability company (LLC)

The Rocket Lawyer blog describes an LLC as “a type of legal business entity that was developed to provide business owners with a lower level of liability. According to the IRS, LLC owners face significantly lower caps on company actions and debts”. Legally, your business can be an LLC but have the option to be taxed as an S-corporation or C-corporation. You have pass-through taxation, like a partnership, so you won’t be double taxed like you would if you own a corporation. You must make quarterly tax payments on your personal income tax forms and submit Form 1065 each year for informational purposes.

C-corporation

If you operate as a C corporation, you have some advantages that the other business types don’t. A corporation operates as a separate entity. That means all debts, obligations, and liabilities are its own. Shareholders' losses are limited to the amount invested in the business. C-corporations are subject to a flat income tax rate and shareholders are taxed on their personal tax returns when profits are awarded as dividends. Form 1120 is the primary tax form for this type of entity.

S-corporation

Turbo Tax reports that “S corporations must always file its annual tax return by the 15th day of the third month following the end of the tax year, generally March 15. The business is responsible for reporting all financial activity on Form 1120S and attaching a Schedule K-1 for each shareholder”.

Due Dates for Quarterly Estimated Tax Filings

Small business owners are required to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year. Deadlines for quarterly estimated taxes are:

  • 1st Quarter: April 15
  • 2nd Quarter: June 17, 2019
  • 3rd Quarter : September 16, 2019
  • 4th Quarter: January 15, 2020

If you don't pay your tax bill by the above deadlines, the IRS will add on additional interest and penalties.

Tax Withholding Requirement if You Have Employees

If you operate with employees, there are several forms to file.

  • Federal income tax withholding (Form W-4): When a new employee starts, they need to fill out Form W-4 (Employee’s Withholding Certificate), which allows them to decide how much federal income tax to withhold from their pay. You’re responsible for submitting that form to the IRS. For more details on Form W-4, the IRS breaks down key information you need to know.
  • Federal wage and tax statement (Form W-2): For every employee you hire, you’re responsible for completing Form W-2, which breaks down their earnings and withheld taxes for the year. Then, you should send one copy to each employee by January 31st that covers the previous year and another to the Social Security Administration by the end of February. Head to the IRS website to learn more about Form W-2.
  • State taxes: Tax withholding isn’t just limited to the federal government—many states require their own forms as well. Find yours on the Bureau of Labor Statistics website.

If you have questions about the federal tax filing process, like what forms to submit if you’re hiring an independent contractor or how to provide expense reimbursements, the IRS has a complete guide with everything you need to know.

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Small Business Tax Credits

According to Investopedia, “Business tax credits are used to lessen the tax obligation that a business may incur. Ideally, a business will try and use all credits that they are qualified to use to reduce the amount of money they owe the federal government come tax time.” Here’s a partial list of credits available for business owners:

Business Tax Credits for Energy Efficiency

Making your business equipment more energy efficient can help you earn this tax credit. You might also be eligible for tax deductions for environmentally friendly upgrades made to your business facilities.

Research and Development Tax Credit Tax Credit for Business Research Activities

Depending on your products or services, you can claim this credit for traditional scientific research, product development, improving product quality, reliability, or function, improving business performance, and making payments to outside researchers or employees who do research.

Access for Disabled Persons Tax Credit

If you upgrade your location to accommodate employees and customers with disabilities, you may be eligible for disabled access tax credits. You’ll increase access and decrease your taxes.

Alternative/Hybrid Vehicle Tax Credit

You can take advantage of this credit if you buy a new (not used) hybrid, electric, or diesel fuel vehicle. This tax credit applies to new cars and trucks that are certified for the credit by the IRS. Your vehicle must meet certain fuel efficiency and mileage guidelines.

Small Business Health Care Tax Credit

The Patient Protection and Affordable Care Act (Obamacare) includes a tax credit to encourage small employers to offer health insurance for the first time or maintain coverage they already have. Visit the IRS website for more information: Understanding the Small Business Health Care Tax Credit.

Work Opportunity Tax Credit

This credit allows employers to get a business tax credit for hiring new employees in categories that include veterans, food stamp recipients, ex-felons, and more. You must document the category, then complete IRS and Department of Labor forms. You then add the credit to your business tax return. Read more on the DOL’s website.

Top Tax Deductions for Small Businesses

Deductible business expenses help entrepreneurs lower the costs of running a business. Here are some of the most common tax deductions available for business owners.

Vehicle Expenses

Gas, repairs, parking, and mileage add up. You can take advantage of the standard mileage rate or deduct your actual expenses. Make sure to keep detailed records and avoid mixing personal expenses with business ones.

Home Office

The home office tax deduction can be complex, visit the SmartBiz Blog for detailed information: How to Take the Home Office Tax Deduction.

Professional Services

If you hire outside professionals (like a social media specialist or an attorney), the fees and overall expense you pay for their services are deductible.

Salaries and Wages

Sole proprietors or those running an LLC may not be able to deduct income you take from your business. However, salaries and wages that you pay to part-time and full-time employees, payments like bonuses, meals, lodging, per diem, and some employer-paid taxes are eligible.

Office Supplies, Expenses, Furniture, and Equipment

You can deduct the above, as long as they are used within the year they’re purchased. You might also be able to deduct the cost of postage, shipping, and delivery services. Keep those receipts! There are various guidelines for depreciation so look this one up or discuss with your tax professional before claiming.

Client and Employee Entertainment

Make sure the entertainment occurs in a business setting and for business purposes.

Employee Benefits

The benefits that businesses like yours offer to employees do more than attract high-quality talent to your team. They also have tax benefits. Keep track of all contributions you make to your employees’ health plans, life insurance, pensions, profit-sharing, education reimbursement programs, and more. They’re all tax-deductible.

Computer Software

Computer software costs or subscriptions, used for business only, are deductible. You are also able write off the cost of your internet provider fees.

Business Location Rent

Rent is any amount you pay for the use of property you do not own. It’s deductible.

Startup Expenses

You may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you open for business. Expenses that are deductible include marketing and advertising costs, travel, and employee pay for training.

Utilities

Keep track of your electricity, phone, and other utilities. If you’re claiming the home office deduction, your landline must be dedicated to your business.

Travel Expenses

If you travel to trade shows or for other professional business, you can take a small business deduction for all your expenses.

Machinery and Equipment Rental

You can deduct rental expenses in the year they occur with no depreciation.

This isn’t a complete list of deductions you might be able to write off. Visit the IRS website for more information: Deducting Business Expenses.

Should Business Owners hire a Tax Professional or DIY?

DIY isn’t a great strategy when it comes to tax preparation. Unless you have a background in tax preparation or accounting, financial tasks-especially taxes-can be daunting. You might be losing out on deductions or facing penalties and fines without a professional in place. Our blog post has valuable information to review before you hire a financial professional: How to Hire an Accountant for Your Small Business.

Additional Resources

The SmartBiz Small Business Blog provides a wealth of information for business owners across America. Here are some additional resources to explore about small business taxes.

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