Planning on striking it out on your own? The best way to ensure your success is by building the proper foundation essential to long-term small business growth. Knowing the general requirements for small business taxation is part of this strong foundation. Here are the basics you need to know:
Choosing the correct legal structure for your business would be the first step to determine the level of legal protection you have and will also establish how your earnings will be taxed in the future. Regardless of whether you choose to run a sole proprietorship, an S-Corp, or an LLC, you must file tax returns to the appropriate governmental authorities on an annual basis. On top of creating the best business structure for your company, we recommend all business owners to apply for an Employer Identification Number (EIN) to separate any potential disputes between owner and business assets and funds.
Your business must pay taxes on any sort of profits it generates. Cash inflows, credit card sales, check transactions, and barter trades are all considered revenue that needs to be reported to the government. However, the good news is that this income can be offset by your operating expenses. There are numerous expenses involved with running a small business. Here are examples of such expenses:
- Costs of Goods Sold (COGS): If you purchase prefabricated items or manufacture products to sell for profits, then you will need to account for COGS. For example, if you paid $2 for a wallet and then sold it for $300, subtracting the cost of goods ($2) from the total sales will net you $298 in income. (This is a phenomenal profit margin, BTW!) Both parts of the transaction (the net income and the COGS) need to be reported on your tax return.
- Home Office Expenses: If you use any part of your home for the sole purpose of conducting business on behalf of your company, a proportionate amount of your mortgage payment or rent can be written off as a business expense. The key here is that the space has to be a measurable designated location in your home (i.e. – using an extra bedroom as a home office), and the space has to be used specifically for business purposes.
- Entertainment: Taking a prospective client out to an event to seal the deal? Half of these expenses can be written off against business revenue. Planning on hosting a holiday party for a client? Half of the holiday party’s expenses can be written off in your company books.
- Car Expenses: Do you drive to visit clients or make deliveries? Keep a log of the miles you cover because a portion of these costs can qualify as an expense.
There are many other taxes involved with operating a business. Sales taxes, payroll tax, among other industry-related taxes (and various fees) are state level taxes that business owners should be aware of. While March and April 15 are the most common due dates for filing small business tax returns to the IRS, you will still need to stay organized throughout the year, with proper documentation for your top-line sales, bottom-line profits, along with receipts for your expenses and deductions. Many new entrepreneurs who go through the tax filing process in their very first year may feel overwhelmed by the amount of detail required to accurately submit filings to the appropriate governmental agencies. We understand, and we are here to help you get everything in order.