Simple Tax Tips For Your Small Business
I’m sure you know how important tax issues are to small businesses. Your annual tax bill will reflect, in part, your skill and knowledge as a small business owner. Not only should you be concerned with your ability to comply with the maze of complex IRS regulations, you should also be concerned with taking advantage of every opportunity to reduce your taxes. In this post we will highlight some simple tips to help you take advantage of tax savings for your small business.
Write It Off!
You are allowed to deduct all “ordinary and necessary” business expenses from your revenues, which will reduce your business’ taxable income. The obvious deductions include expenditures for business travel, equipment, salaries, or rent. Here are a few more deductions that are often overlooked:
- Business losses
Business losses can be deducted against your personal income to reduce your taxes. If your losses exceed your personal income for the year, some of those business losses may be “carried forward” to reduce taxable income in future years.
- Mixing business with pleasure
Even if you plan to take some “me” time to lounge on the beach during your business trip, you’re (most likely) still able to deduct the trip. If more than half of your business trip is devoted to business, you can deduct the traveling costs, and any other business-related expenses incurred on your trip.
If your business has employees, there are a variety of taxes that must be withheld from your employees’ wages. Some of the important ones include:
- Social Security (or FICA), Medicare, and federal and state income taxes must be withheld from every employees’ pay.
- You must match the FICA and Medicare taxes withheld from your employees’ wages. In other words, employers must remit two times the required withholdings for FICA and Medicare taxes.
- Most businesses are required to pay both federal and state unemployment taxes. These payments are not deducted from the employee’s wages.
Sales Tax and Other State Taxes
Most products are subject to sales tax, while most services aren’t. If your business sells a product or service that is subject to sales tax, you must register your business with your state’s tax department. You’ll also need to track your taxable and nontaxable sales and include these numbers on your business’ sales tax return.
When determining whether or not your business is subject to sales tax in a particular state, the IRS considers whether your business has a “presence” in that particular state. If your business does, then you’re liable for paying state sales tax in that state. A “presence” in another state does not necessarily mean that you have a physical retail outlet in that state. If you maintain an office, warehouse, or you have employees working for you in that state, the IRS may determine that you have a “presence” in that state.
Even if you don’t maintain a physical presence in another state, you may be subject to another state’s tax regulations. If you sell items over the Internet (or any other medium including catalogs, brochures, etc.), then you may be subject to a state’s “use tax.” It’s important to make sure you are aware of your tax responsibilities in all states in which you are doing business, or maintain a “presence.”
Don’t Throw Away Your Tax Documents!
With the rise in computer technology, it’s easy to store your business files and documents without cluttering your office with dozens of boxes and filing cabinet. If you’re ever audited, you’ll save a lot of time and money by storing copies of your tax returns, licenses, founding documents, and receipts for any business-related expenses. You’ll want to hold onto any tax-related documents for a minimum of seven years. You should regularly backup your computer’s hard-drive, and store your tax-related documents in more than one place to ensure they’re not accidentally destroyed.
Individual Deductions for Charitable Contributions
You may be able to claim your charitable contribution as a deduction on your individual tax return. Unless your business is a C Corporation, any charitable contributions can be claimed as individual deductions for business owners. This is true whether your business is a sole proprietorship, partnership, limited liability corporation, or S corporation. Here are some of the basic rules related to charitable contributions:
- You can only deduct contributions to charities listed (by the IRS) as “qualified organizations.” See IRS Publication 78 for this list.
- Contributions of more than $250 require a letter of receipt from the qualified organization. Otherwise, a canceled check is sufficient.
- In general, donations of property can be deducted for their fair market value at the time you contribute the property. Also, you cannot deduct the value of any time or services that you volunteer to a qualified organization.
- You are not permitted to deduct any part of a contribution that benefits you. For example, if you receive a gift in exchange for a charitable donation you can only deduct the amount of the contribution that exceeds the value of the gift that you received in exchange.
Business loans can offer substantial tax benefits. The principal and interest you pay on your business loans are considered business expenses, and you can deduct these expenses from your taxable income. In order to take advantage of these tax deductions, you must report the entire amount of the loan, and the assets and expenditures (financed by the loans) must be necessary to operate your business.
While most business loans are not considered income, there’s one notable exception. When you negotiate with a creditor or lender to reduce your debt, you will owe taxes on the amount of any debt that is forgiven. This forgiven debt is considered “cancellation of debt” (or COD) income by the IRS.
Due to complex nature of the tax regulations, it’s important you consult an experienced tax attorney if you have any tax-related questions regarding your business. Another important resource is the IRS small business website.
If you have any additional questions related to your business taxes, please comment below, or contact us.