The beginning of the year is a good time to review your taxes, namely what your business will owe come tax time. Not to mention, April 15th has a way of unexpectedly creeping up on you. But before you drown yourself in numbers, deductibles, credits and write-offs, it may be a good idea to review some of the basics. From there you can take a look at your specific circumstances, such as business working capital, financing conditions and any possible tax deductibles.
Types of Business Taxes
Income taxes – Most states impose an income tax, and all businesses are subjected to a federal income tax rate. Depending on the legal structure of an organization, these taxes may be paid by individual proprietors or the business as a whole.
Sales tax – Most states mandate a tax on the sale of goods and services. While customers pay the actual tax, businesses can face penalties for not collecting the taxes and reporting them to the state. Online retail giant Amazon.com, for example, recently fell into some hot water for not collecting state sales taxes from its customers.
Excise tax – Depending on the kind of business you run, you may have to pay excise taxes on fuels, highway usage, alcohol distribution and other demands.
Employment tax – If you have employees, you must withhold income taxes and your workers’ share of Social Security and Medicare taxes. You must also pay an employer share of FICA, as well as state and federal unemployment tax, according to Inc. magazine. There are also self-employment taxes for freelancers, solo entrepreneurs and other related professions.
Tax Law
As intimidating and esoteric as it may be, business owners need to stay relatively informed in regards to changes to tax law. In some cases, changes enacted by Congress, court decisions or the Internal Revenue Service may mean additional red tape for your organization. However, such situations may also broaden your range of potential tax deductions. Accordingly, don’t wait until an annual meeting with your accountant to learn about new opportunities.
“A closely held company that is profitable should seek an outside tax planning firm just to take a second look at how they are structured and how they are treating all transactions,” attorney and CPA Richard Colombik told Inc. “That doesn’t mean their accountant is bad or their attorney is bad. It’s a way for someone to come in and recommend possible alternatives.”
An Overview of Tax Deductions
Business owners cannot afford to have a lax policy in regards to tax and regulatory compliance. That being said, you need to establish consistent record- and bookkeeping habits.
“The tax law specifically requires certain records in order to take deductions,” tax attorney Barbara Weltman told Inc. “Without these records, legitimate expenditures may not be deductible.”
You should be able to accurately track both revenue and expenses. You should also have procedures in place to collect and store receipts and other proof of expenditures. Inc. magazine recommends five key ways to save on your business tax obligations.
1.) Adopt an “accountable plan,” in which you reimburse employees for business expenses. These reimbursements are not included on W-2 forms and will save the company payroll taxes.
2.) Introduce a retirement plan. If your business is profitable, you can protect income through a qualified retirement plan that offers tax deductions in exchange for contributions. Employees may also appreciate such a measure.
3.) Defer income. By sending your bills out a few days later in the last month of the year, you’ll be paid a few days later in January of the new year, thus able to defer the income, as opposed to immediately declaring income in December.
4.) Structure your business accordingly. Business entities, such as limited liability companies and S corporations, all have individual tax rates and stipulations. Consult your attorney to ensure that your legal structure is aligned with your cost-saving efforts.
5.) Consider employee benefits over raises. An employee raise means greater tax liability on income, FICA and Medicare, but a larger contribution to health insurance, for example, does not entail higher tax obligations and both parties end up saving money.
“I get asked frequently how to determine when you need to talk to a professional and there are two ways to gear it,” Colombik adds. “One way is to look at the tax and calculate whether it will cost me less to talk to a professional than to pay my tax bill. The other way is to consider that if you’re not paying a lot of tax in that area now, but you know you are going to be in the future, you can find out if there is a way to plan properly.”
