Taxes are one of the most important issues facing small businesses. And like a company’s profits, its annual tax bill will in part reflect the owner’s skills and knowledge. Business owners need to be sure that they are meeting all of their responsibilities to the tax man — and also seizing every opportunity to reduce their taxes. These tax tips will ensure Uncle Sam is not getting more than his due.
Writing It Off: Deductions
Businesses can deduct all “ordinary and necessary” business expenses from their revenues to reduce their taxable income. Some deductions are obvious — expenditures in such areas as business travel, equipment, salaries or rent. But the rules governing write-offs aren’t always simple. Don’t overlook these potential deductions:
- Business losses. Business losses can be deducted against a business owner’s personal income to reduce taxes. If a business owner’s losses exceed personal income for the year, some of the year’s business losses can be used to reduce taxable income in future years.
- Trips that combine business and pleasure. If more than half of a business trip is devoted to business, deduct the traveling costs, as well as other business-related expenses.
- Purchases financed by business loans or credit cards. These costs can be deducted this year even if they won’t be paid off until later. Deduct the interest on the loans themselves, as well.
If a business has employees, a variety of taxes will have to be withheld from their salaries. Among them are:
- Withholding. Social Security (FICA), Medicare and federal and state income taxes must be withheld from employees’ pay.
- Employer matching. Businesses must match the FICA and Medicare taxes and pay them along with employees.
- Unemployment tax. Businesses must pay federal and state unemployment taxes.
Quarterly Estimated Taxes
This area trips up many an entrepreneur and is especially vexing for home-based businesses. Failure to keep up with estimated tax bills can create cash flow problems as well as the potential for punishing IRS penalties. Among the issues are:
- Who should pay? A business probably must pay quarterly estimated taxes if the total tax bill in a given year will exceed $500.
- How much should you pay? By the end of the year, either 90 percent of the tax that is owed or 100 percent of last year’s tax must be paid (the figure is 110 percent if a business’s income exceeds $150,000). Businesses can subtract their expenses from their income each quarter and apply their income tax rate (and any self-employment tax rate) to the resulting figure (their quarterly profit).
Most services remain exempt from sales tax, but most products are taxable (typical exceptions are food and drugs). If a business owner sells a product or service that is subject to sales tax, he or she must register with the state’s tax department. Then taxable and nontaxable sales must be tracked and included on the company’s sales tax return.
For more information and specifics about small business tax matters, go to www.irs.gov/businesses/small.