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Small Business Taxes: Understanding Your Tax Obligations and Maximizing Deductions

If you own or operate a business, taxes are inevitably part of the equation. While business taxes can seem complex, having a solid understanding of the key types of business taxes, what expenses you can deduct, and how to properly file and pay taxes is crucial.

This comprehensive guide covers everything you need to know, including:

Let’s get into the nitty gritty of small business taxes!

Overview of the Main Types of Small Business Taxes

There are a few primary categories of taxes that businesses need to be aware of:

Income Taxes: This includes federal and state income taxes on net business profit earned each year. The amount will vary based on your business structure. Most common are sole proprietorships and LLCs taxed as pass-through entities.

Self-Employment Taxes: Since you are self-employed, you must pay self-employment taxes rather than payroll taxes. This includes Social Security and Medicare taxes and is 15.3% of your net income.

Sales & Use Taxes: If you sell taxable goods or services in your state, you must collect and remit sales tax to the state. Use tax applies to goods you use for your business.

Payroll Taxes: If you have employees, you are responsible for payroll taxes including Social Security, Medicare, federal and state unemployment taxes.

Excise Taxes: These apply to specific industries like alcohol producers, tobacco producers, tires, gasoline, etc.

Many business owners choose to work with a knowledgeable tax professional or CPA to help ensure they are paying estimated taxes on time, filing the proper tax forms, and maximizing available deductions.

Common Business Expenses You Can Deduct

As a business owner, one of the keys to reducing your taxable income is deducting all allowable business expenses. Make sure you are tracking every legitimate business expense throughout the year and keeping all receipts. Here are some of the most common deductible expenses:

  • Equipment, computers, furniture, machinery, vehicles, etc. Can deduct a portion each year as depreciation.

  • Home office deduction if you use a portion of your home exclusively for business.

  • Employees' wages, payroll taxes, and benefits like health insurance.

  • Advertising costs for things like print ads, online ads, business cards, etc.

  • Software, internet service, cell phone if used for business.

  • Accounting and tax preparation fees.

  • Licensing, permits, insurance costs.

  • Office supplies, postage and shipping, printing expenses.

  • Business travel (airfare, hotels, rental cars, meals etc.)

  • Contract labor or freelancers you pay for services.

  • Inventory costs.

  • Storage and distribution costs.

  • Business bank fees and credit card processing fees.

  • Continuing education and skills training to improve business knowledge.

  • Legal and professional services like lawyers, accountants, consultants etc.

  • Rent, utilities, repairs, and maintenance for business property.

  • Interest you pay on business loans and credit cards used solely for your business.

  • Local business taxes and other government fees.

The list could go on and on! The key is keeping detailed records to prove the expenses should they ever be questioned. An accountant can help identify all allowable write-offs.

How to Reduce Your Business Tax Liability

Now that you know what you can deduct, here are some key strategies to employ in order to maximize deductions and reduce your business's overall tax burden:

  • Incorporate or form an LLC to take advantage of lower corporate tax rates and other benefits. An accountant can advise if this makes sense.

  • Hire family members and pay them a reasonable wage. This converts profit into a deductible wage expense.

  • Establish an employee retirement plan like a Solo 401k or SEP IRA to contribute pre-tax dollars.

  • Pay bills and invoices in December (or the company's fiscal year-end) to accelerate deductions.

  • Purchase equipment, furniture, machinery, etc. at year end to utilize depreciation deductions.

  • Meet the safe harbor election each year to defer revenue and the related tax liability.

  • Invest in continuing education and training for yourself or employees to improve business knowledge. Deduct the tuition, travel, materials etc.

  • Consider using a vehicle solely for business to maximize potential car and truck expense deductions.

  • Deduct 100% of healthcare insurance premiums paid for employees.

  • If eligible, take advantage of business tax credits offered by federal and state governments.

  • Hire an accounting firm to handle payroll and properly track deductions.

Estimating and Paying Quarterly Taxes

As a business owner, you likely need to make quarterly estimated tax payments on your income during the tax year rather than waiting to pay everything at year-end. Failure to make quarterly payments can result in penalties and interest.

Both federal and state estimated taxes are generally due each year by April 15th, June 15th, September 15th, and January 15th for individual filers. Any shortfall is reconciled when you file your annual tax return.

Determining the amount to pay each quarter can be tricky. Work closely with your accountant and use your prior year’s taxes as a baseline. You can estimate high initially and then reduce later payments if you anticipate a lower tax bill.

Properly Filing Your Business Tax Forms

Don’t let filing your annual business tax returns intimidate you. Just remember to engage tax professionals to ensure you complete all required forms and schedules accurately and on time.

The most common business tax forms include:

  • Form 1040 Schedule C - For sole proprietorship income and expenses

  • Form 1065 - For partnerships

  • Form 1120 - For C corporations

  • Form 1120-S - For S corporations

  • Employment tax filings like 941, 940, W-2, W-3 to report payroll

  • Form 1099 to report non-employee compensation

  • Sales tax returns filed monthly, quarterly or annually as required in your state

Double check all filing deadlines and extensions so you avoid any costly late filing penalties from the IRS and state tax authorities.

Valuable Business Tax Tips & Pointers

Follow these additional tips for staying on top of your business taxes:

  • Claim all available tax credits like the Research Tax Credit. Every dollar counts!

  • Maintain detailed mileage logs for any vehicles used for business.

  • Avoid paying estimated taxes late which results in penalties.

  • Review sales tax requirements in states where you have “nexus” and collect/remit sales tax.

  • Require W-9 forms from contractors so you can issue 1099 forms.

  • Deduct health insurance premiums paid for employees as a business expense.

  • Allow an accounting firm to handle payroll and quarterly/annual tax filings for you.

  • Contribute up to $58,000 pre-tax as an employer to defined contribution retirement plans.

  • Provide vehicles to employees only for business use to maximize write-offs.

  • Write off damaged and expired inventory so it’s not sitting there reducing your deduction.

The list of tips could go on and on! Work closely with a trusted tax professional or accountant to ensure you maximize every allowable deduction while properly filing and paying business taxes. The cost of their services is a deductible expense after all!

Frequently Asked Questions About Business Taxes

If you’re a new entrepreneur or small business owner, you likely still have many questions about how taxes work. Here are answers to some of the most commonly asked questions:

How do I know if I need to make quarterly estimated tax payments?

You generally need to make quarterly payments if you expect to owe at least $1,000 in taxes when you file your return. The IRS will assess penalties if you don’t make quarterly payments and end up owing taxes.

When are business taxes due each year?

The deadline to file and pay business taxes is typically April 15 for sole proprietors and entities like partnerships, LLCs and S Corps. C Corporations generally file by March 15.

What if I can’t pay my full business tax liability when I file?

You can request an installment agreement to make smaller monthly payments over time and avoid tax liens or levies. Interest and penalties still apply though.

Can I deduct my health insurance premiums as a business owner?

Yes, 100% of health insurance premiums paid for yourself, family members, and employees are deductible as a business expense.

How long should I keep business tax records and receipts?

The IRS typically only goes back 3 years for audits, but you should keep tax records and support for at least 7 years to be safe.

Do I need an EIN or can I use my Social Security number?

Sole proprietors can use SSN but should get an EIN if hiring employees or forming an LLC. An EIN provides liability protection.

Can I deduct travel expenses for business conferences and training?

Yes, you can deduct expenses like airfare, lodging, meals, seminar costs and local transportation provided the primary trip purpose is business related.

Putting It All Together - Small Business Taxes

The bottom line is that taxes should not be intimidating for small business owners. Yes, there are many requirements that necessitate careful record keeping, filing accurately, and paying on time. But the potential deductions and credits available are significant, and working with a great tax professional or accountant is well worth the investment. Whether you're a newcomer to business or a seasoned entrepreneur, the professionals at United Tax are ready to assist you. Contact us today to schedule a small business tax consultation and to see how we can help you minimize your liability.

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