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Tax time can be a headache for many Americans, and it can be even worse for small business owners. There is a lot of financial information to organize and keep track of, and it can be overwhelming if you’re not properly prepared. Here are 5 tax tips to help make the process a little smoother for your small business.
1. Understand your business structure.
The way you have structured your business
will impact your tax obligations. Your business structure can influence which taxes must be paid by you personally and which ones must be paid by the business, and it can impact other things as well, such as how much tax you’ll owe and when taxes must be paid.
2. Be aware of the different types of business taxes.
- Sole Proprietors. If your business is structured as a sole proprietorship, there is very little difference between you and your business because you are the individual operator. You can keep separate accounting records, but all the taxes will flow through your personal income tax return and will be taxed at your personal tax rate. Taxes are typically paid as quarterly estimated taxes when you are a sole proprietor.
- Partnership. Partnerships provide customizable ways to handle your business’s taxes and profits. With a partnership, each owner must pay income taxes, self-employment taxes and quarterly estimated taxes, and the business files annual returns. The business is not responsible for corporate income taxes with a partnership due to “pass-through taxation”.
- S-Corporation. With an S-corp, federal taxes are paid by the business owners and shareholders. It is popular for planning taxes at the federal level and avoids what is called “double taxation” because the business does not pay corporate taxes.
- C-Corporation. With a C-corp, personal and business taxes are legally separated from the business owners. Taxes are paid at the corporate level and the business owners only pay taxes on the dividends or other forms of income they receive from the corporation.
In order to effectively prepare for tax time, it’s important to know which kinds of taxes your business may be subject to. These include:
3. Consult a professional.
- Sales Taxes. If your business sells goods or services, you will likely be responsible for collecting and reporting state-mandated sales tax.
- Self-Employment Taxes. These are the taxes you’ll remit to the federal government if you are self-employed. They cover the costs of social security and Medicare.
- Employment or Payroll Taxes. If you have employees, these taxes must be deducted from your employees’ paychecks and are generally paid by you to the government along with your employer’s share of the taxes.
- Property and Inventory Taxes. Your business will be subject to property tax if the business owns any land, real estate, or commercial property. These taxes are set by the state or local government where your business is located. Additionally, some states charge an inventory tax for property like furniture and equipment owned by the business.
- Excise Taxes. If your business is involved in certain industries such as fuel, tobacco, air transportation, or the sale of heavy-duty trucks, trailers, or tractors, you may be subject to excise tax as well.
- Franchise Taxes. The term “franchise tax” often gets confused for something only a franchisee must pay. However, franchise tax actually applies to many non-franchise corporations and business entities. It’s charged on an annual basis at the state level for doing business in that state. However, not all states charge a franchise tax. Neither Massachusetts or Rhode Island currently have a franchise tax.
You may already have a dedicated accountant for your small business. If not, you should consider hiring one
. A professional accountant who works with small businesses is a valuable resource in helping you plan for and systematically address all of your tax liabilities. They can also help to ensure you are compliant with all appropriate laws and regulations. Once you have a trusted accountant, consider meeting with them proactively throughout the year, rather than just at tax time. This will help to ensure that you’re prepared, and that you’re aware of potential tax implications throughout the year.
4. Research potential exemptions and deductions.
Some states offer special exemptions and deductions based on local priorities and goals. For example, Massachusetts
provides numerous business tax credits. Rhode Island
also has a some specific tax exemptions
available to small businesses.
5. Get all of your documents in order.
Many business owners are so busy running their business that they fail to take the time to look at their overall tax situation before it is time to file taxes. Proactive planning
can help ensure your business is ready for tax season:
- Be aware of which tax forms you will need to prepare
- Have your financial records organized showing your expenses, new assets and more
- Ensure your financial statements are balanced and correct
- Make sure all business income is accounted for
- Complete all tax requirements for employees such as 1099 or W-2 forms
By taking some time to proactively address and plan for your business tax obligations, you can help ease some of the pain associated with tax time. Also, if you have fallen behind on any of your tax liabilities, it may make sense to prepare a plan and work with a dedicated business banker
so you can obtain the funding necessary to address the situation. There are many avenues you can take to help ensure your business continues to grow without the burden of overdue tax liabilities. Understanding that taxes are a part of running your business and handing them as a standard part of your business operations, will help to ensure your long-term success.