Understanding Federal Business Taxes
Federal business taxes are a key part of being a business owner.
In fact, understanding your federal business tax implications can also help make sense of your business’ performance, while also assessing any tax breaks or credits you may be qualified to receive.
In this article, we will discuss:
- The basics of federal business taxes
- Things you need to know before you file
- Tips to make taxes easier
Federal Business Taxes: The Basics
By the letter of the law, the United States imposes a tax on the profits of US-resident corporations at a 21% rate of taxation (prior to 2017, it was 35%).
In 2017 alone, corporate income taxes raised $297 billion – which, ultimately, accounts for 9% of total federal revenue.
As a business owner, you have multiple taxes you need to pay, which include:
Today, we’ll focus on federal taxes, but keeping each in mind will help you file your taxes accurately and to make payments on time. Additionally, the structure of your business will also determine which taxes you pay (and the payment requirements).
The following are the various business taxes you need to know:
- Income Tax – This is a tax on any income earned, or received, during the year.
- Employment Taxes – If you have employees, you must pay a tax on them.
- Excise Tax – This is a tax on businesses that manufacture or sell products.
- Property Tax – A tax on the property you own and operate from.
- Sales & Use Tax – States may tax the sale of goods and services if they choose.
- Estimated Tax – Federal tax on income that is not subject to withholding.
- Self-Employment Tax – A tax on those who consult their own business.
While some of these taxes may skew towards states and local municipalities, federal taxes can be considered the sum whole of the taxes you need to pay as a business owner.
That said, there are some more fundamental things that you need to know in order to comprehend and effectively manage your unique tax implications.
4 Federal Tax Considerations You Should Make
As a small business owner, you need to keep a lot of things in mind when it comes time to do your taxes – these are the five most important:
1. Structuring Your Business
The formation stage of your business is absolutely vital to its success. Different legal structures can have a profound effect on your tax burden since each structure has different tax implications. There are four main types:
- Sole Proprietorship – Like an extension of your personal tax return, you simply add the profits and losses of your business to this in order to calculate your tax burden.
- S Corporations – Income which is passed directly to shareholders – an S corporation is the most common for small business owners.
- C Corporations – An option for more traditional corporations – it is a company with shareholders, a board of governors, officers, directors, and employees.
- Limited Liability Companies (LLCs) – An option for many small businesses, with no double taxation and deductible business losses.
2. Understanding Deductions
In starting your business, or keeping it afloat, you are likely to encounter a whole host of expenses to keep things running smoothly.
That said, a small business owner has the unique opportunity to minimize their business taxes by “writing off” a lot of those operational expenses.
This can include things such as:
- Vehicles expenses
- Contract Labor
- And More…
3. Writing Off Startup Costs
Did you know that federal taxes allow small businesses to deduct a range of startup expenses before initiating operations?
As per the IRS, you can deduct up to $5,000 in business startup costs – and up to $5,000 in organizational costs. This way, you can begin to deduct expenses before your business is fully operational (and when you may need the money the most).
The typical costs associated with setting up a business include:
Office Space/Real Estate
Business Loan Fees
There are also additional costs that could include training, finding supplies, and advertising to potential clients. Keep in mind, though, that all of these expenses must go toward creating a company – if your idea doesn’t come to fruition, they will not qualify.
4. Paying Quarterly Taxes
Individuals, including all the aforementioned classes, need to make quarterly estimated payments if they expect to owe taxes of $1,000 or more.
Business owners have the chance to calculate their estimate payments using a form, and it may be helpful in these cases to rely on last year’s income, deductions, and credits to start.
Preparing Your Federal Business Taxes
Just like anything in life, the process of filing your taxes as a small business owner is much easier if you take the time to prepare.
As an easy way to start, here is what you will need:
- Last year’s business tax return
- Payroll documents
- Bank and credit card statements
- Accounting documents
- Partnership agreements
- Depreciation schedules
These documents are a great place to start, but it would also help to have the following:
- Sales records
- Employee wages
- Insurance premiums
- Transportation and travel expenses
- Advertising costs
- Office supplies and equipment
- Phones and other communication devices
Each of these can help craft a more convenient, and seamless, tax return. Your return will ultimately be more accurate and will be easy to log and record for future reference.
Tips for Federal Business Tax Deductions
The deductions that apply to almost all small businesses include:
- Vehicle Expenses – If you can prove that you use your vehicle for your business, you can deduct the cost of operating that vehicle.
- Insurance Expenses – Protecting your company is important, and if you pay for any policy relating to your business you can typically deduct it.
- Rent – Space for your business is essential. If you rent, you can deduct your rent payments (this also includes any equipment you rent, as well).
Use Board for Tax Season!
Board is an application for small business owners to help them better understand their finances, their options, and to empower them to learn from them and act on them.
It also helps make smart, and timelier, business decisions. This is why, especially during tax season, you can rely on Board as a way to store your expenses and results to help make sense of your numbers.