Basic Tax Considerations for Small Business Owners

Run Your Business Feb 21, 2017

As a small business owner, the last thing you probably want to think about is taxes. Whether you are starting a new company or you’ve been in business for many years, taxes can feel like a burden no one wants to bear. But it’s still important to understand the basics, even if you hire a professional accountant.

What type of business do you operate?

The first question to ask is what type of business you are operating. Most small businesses fall into the category of limited liability corporations (LLCs), S-Corporations or Sole Proprietorships, and each classification comes with specific tax considerations. In a Sole Proprietorship, which is the simplest business structure, you pay taxes on all earnings for your business. LLCs are the most common type of structure and offer a lot of flexibility on how the business is taxed and run. S-Corporations are the structure used when wages are paid to the owner/employees and those wages are taxed as earned income. 

Handling deductions

Small businesses are able to claim tax deductions for a wide variety of expenses, particularly expenses incurred to produce additional income. Potential deductions for a business include:

  • Home office (This comes with a choice of a regular or simplified deduction method.)

  • One-time deductions for equipment vs. depreciation of equipment, such as furniture and computers.

  • Mileage (Note that the rate drops from $0.57.5 to $0.54 in 2017.)

  • Hotels and travel (air, train, auto) are 100% deductible; meals are 50% deductible

  • Depreciation of property

  • Bad debt, which refers to a client or customer defaulting on a payment to your business, may be deductible.

  • Goods: If your business sells goods, you can deduct the cost of goods that you sell but aren't paid for. (Note that no deduction is allowed for time spent providing services to a client or customer who doesn’t pay.) 

Taking advantage of tax credits

Unlike deductions, which reduce the amount of business income that is taxable, credits lower the tax. Many tax credits are tied to specific industries or types of businesses. One of the most significant tax credits for small business owners is the Health Care Tax Credit, available for employers that:

  • Have fewer than 25 full-time equivalent employees

  • Pay average wages of less than $50,000 a year per full-time equivalent (indexed annually for inflation beginning in 2014)

  • Pay at least half of employee health insurance premiums 

Keep in mind that this tax credit, as with other tax policies, may change, especially if the Affordable Care Act is overturned.

Estimated taxes

As a business owner, your tax obligation is to pay taxes almost as quickly as you earn income. For that reason, if taxes aren’t being withheld from salaries or other payments, you need to pay estimated tax payments each quarter of the calendar year.

Figuring out what you owe each quarter requires looking at your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Each business and every situation is unique, so it’s important to consult a tax advisor for help in calculating the amount. 

State and Local Taxes

In addition to federal taxes, businesses need to pay state and local taxes, including income and employment taxes. Look up your state’s business tax requirements.

Hiring a tax professional

Unless you are an accountant, it is beneficial to hire one, even if you feel your business is not very complicated. Paying taxes, identifying deductions and keeping up to date with current business tax law are serious responsibilities, and a tax professional can be a tremendous help.

Sources:

https://startupsavant.com/how-to-choose-your-business-structure/

https://www.u-biz.com/ublog/frequently-overlooked-small-business-tax-considerations/

http://www.bankrate.com/finance/taxes/simplified-home-office-deduction.aspx

http://www.bankrate.com/finance/taxes/simplified-home-office-deduction.aspx

https://www.irs.gov/


Brad Kudick 2013 (2)
Kelly Burkart , is a freelance writer from Minneapolis, Minn. While she has spent most of her time writing about financial services the past 15 years, she has also explored and written about everything from cardiovascular health to travel, higher education and sustainable energy practices.