Taxes are a necessary part of operating any business. However, they can feel confusing, especially when dealing with IRS lingo.
The type of business entity you establish determines which taxes you must pay and how to file them. This article provides a general tax preparation checklist that can be tailored to the specific types of taxes you must file.
What are the Different Types of Taxes?
There are many types of taxes, and they all affect your business in different ways. Some are direct, such as income tax withheld from paychecks, while others are indirect, such as sales or excise taxes. Some are regressive, meaning that they place a greater burden on lower-income taxpayers than higher-income ones. Others are nonneutral, such as a Pigovian tax that taxes a good or service to pay for the negative externalities of that good or service.
Small businesses are especially sensitive to tax laws, since most of them are pass-through entities that report their income on individual tax returns. As a result, any increase in income tax rates reduces consumer disposable income, which can have a direct effect on demand for goods and services. Other types of taxes include property taxes, such as those levied on land or buildings; wealth taxes, such as scutage (a payment in lieu of military service) and window tax (tax on the number of windows in a building); and luxury sales taxes.
What are the rules for filing a tax return?
The rules for filing a business tax return depend on your business structure. If you’re a sole proprietor, partnership or LLC, your federal tax obligations are determined by filling out IRS Form Schedule C. If your company is a corporation, you’ll file a corporate income tax return with IRS Form 1120.
When it comes to state taxes, the requirements vary by jurisdiction, but most require that you file a business tax return if you have net earnings from your business. In addition, your business must pay any applicable property taxes on any land or buildings it owns.
Many entrepreneurs make mistakes when it comes to filing tax returns because they misunderstand how the IRS defines income (profits). For example, many incorrectly believe that informational returns such as 1099-K reflect total volume of payments, not income. Accountants help you evaluate your options to determine when, whether and how to conduct transactions that minimize tax liability. Avoiding taxes is smart, but evading them through deception or concealment is illegal.
What are the penalties for failing to file a tax return?
If you fail to file your tax return by the due date, the IRS charges a failure-to-file penalty of 5% of the taxes you owe for each month or partial month that your return is late. The penalty maxes out at 25% of the total amount you owe for the year.
If you owe money for the current tax year, you can lower your business tax bill by filing a tax extension and paying any taxes you owe. You can also claim any legitimate deductions to reduce your taxable income, such as capital expenditures, start-up expenses, meal and entertainment expenses, compensation, business gifts and vehicle expenses.
Understanding your business taxation obligations and knowing how to complete the appropriate forms will help you save time, money and hassle when filing your federal and state returns. If you’re unsure of your responsibilities or which forms to file, consider hiring a professional advisor. Attorneys on UpCounsel are experts in business taxes and can help you determine which type of entity will work best for your business’s goals.
How can I lower my tax liability?
Paying taxes isn’t a pleasurable experience, but there are many proven and legal ways to reduce your tax liability. Proactive tax planning with a qualified tax professional throughout the year can help you optimize deductions, credits and tax exemptions to lower your business’s overall income tax liability.
Several factors will influence the tax liability of your company, including entity type, location, and accounting method. In particular, your choice of tax year (calendar or fiscal) can have a significant impact on your business’s bottom line.
Conlcusion:
Keeping track of and documenting all of your business expenses is essential to reducing your taxable income and tax liability. For example, marketing expenses, capital expenditures, employee compensation, home office expense, meal and entertainment expense, and travel expenses are all typically deductible. Investing in retirement plans for your employees can also help lower your business’s tax liability. Likewise, writing off bad debts before the end of the year may be tax-deductible.