Small Business Taxes – Understanding The Basics

January 31, 2018

Small business taxes are an annual distraction for business owners. While many small businesses outsource most, if not all of their tax needs, it is important to learn and understand the basics of this inextricable part of modern commerce. Doing so can help you save money and to make sure all of your obligations are met. These basics are relatively simple to understand, and can be imperative to the overall success of your organization.

Time to Get Started:

If you are at that exciting time where you are still in the drawing-board phase, you are at the perfect time to start planning your small business tax strategy. Different considerations to keep in mind are what type of transactions you’ll be making and how you will be making them.

Business Structure Impacts Taxes:

Different types of business structures, such as a sole proprietorship, an LLC, partnerships and corporations, have different tax methods. The actual structure of your business is based in large part on what type of tax strategy you will have. Some can be good for certain situations, while less so for others.

Tax Years:

You will also need to determine your tax year and the method you will be using for accounting purposes. There are two types of tax years, the Calendar Tax Year and the Fiscal Tax Year. As its name would indicate, the former refers to the 12 consecutive months that begin on the first of January and end on December 31^st. A Fiscal Tax Year begins on the first day of any month other the January and continues for the next 12 consecutive months to end on the last day of the twelfth month.

Accounting Methods for Small Business Taxes:

Accounting methods come in two basic varieties, consisting of the cash method and the accrual method. The primary difference between the two lies in when income and expenditures are recorded. With the cash method, expenses and income are recorded as soon as money changes hands. The accrual method entails reporting both expenditures and revenue when they actually occur, even if no money has yet transacted. An example of this would be reporting an invoice that uses Net30 payment terms even before it is paid up.

Self-Employment Tax:

Choosing to open a business that is unincorporated or a sole proprietorship means that you will need to pay taxes at a rate different than personal income taxes. This applies to all business varieties that earn more than $400 per tax year and is currently at the rate of 15.3 percent. This includes 12.4 percent for Social Security and 2.9 percent for Medicare.

Depreciation:

Even the smallest of businesses may need expensive equipment from time to time. Rather than claim the entire cost amount at one time, when the item is purchased, increments are claimed each year over the projected life of the item. As each year progresses, you can add up all of the increments you have claimed and subtract it from the actual cost of the item to get the “book value” it currently holds.

Deductions:

One of the most important aspects of saving money when it comes to your small business taxes is deductions. Deductions are different expenses dealing directly with the operation of your business and can be subtracted from your gross income to lower the amount of tax obligation. Deductions come in a variety of forms and depend heavily on what industry you are in, how large you are and how you conduct business.

Some of the most common deductions include:

• Travel Expenses
• Business Startup
• Business Gifts
• Meal and Entertainment Expenses
• Home Office Expenses

It is important to make sure that anything you decide to claim is a legitimate deduction. Failure to do so can leave you wide open to an audit and can result in stiff fines and penalties.

Net Operating Loss:

Given the fluid nature of business in general (small businesses in specific), some years may result in more expenses and deductions than money being brought in. This is called a net operating loss and will have an impact on the amount of small business taxes you need to pay. The amount over and above the balance for the loss year can be applied to taxing in the past or future or applied towards any other types of income.

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