Small Business Taxes
Paying taxes and tax planning are key requirements of running a successful small business. Learn about the taxes that businesses owe, the strategies they can use, the documents they need to produce, and the software that can help.
What’s the best way for small businesses to calculate depreciation?
Depreciation refers to how much of an asset’s value is left over time due to usage or becoming obsolete. Businesses can recover the cost of an eligible asset by writing off the expense over its useful life. There are five ways of calculating this under generally accepted accounting principles (GAAP). The straight-line method is the simplest to calculate and most commonly used.
What do online businesses need to know about cost of goods sold (COGS)?
COGS is the accounting term that describes the expenses incurred to produce the goods or services a company sells. COGS is also a tax deduction available to businesses, even online resellers who don’t have raw material or production costs. However, while shipping raw materials counts as a COGS expense, bubble wrap to deliver a widget to a customer doesn’t, so it’s important to learn the rules.
Should your small business become a limited liability company (LLC)?
Maybe. LLCs provide superior legal and financial protection for personal assets of company owners, who also can deduct 20% of their business income before their taxes are calculated. An LLC can choose to be taxed as a S Corporation or a C Corporation. Under the Tax Cuts and Jobs Act, there is especially beneficial tax treatment for S-Corp distributions. Check with a tax advisor to see which structure makes the most sense.
Can your business be taxed on items like office furniture and computers?
Yes. For tax purposes, furniture and office equipment are considered “tangible personal property,” and such movable items are taxable by states. They can be depreciated over five or seven years using straight line depreciation—or are eligible for accelerated depreciation. In most states, businesses owning tangible property on Jan. 1, will owe taxes on it to local authorities on April 1.Learn More: Tangible Personal Property
Can you ever deduct a capital expenditure the same year you spent the money?
Capital expenditures generally must be depreciated over the time period considered the lifespan of the product—three, five, 10, or more years. But some types of expenses for business equipment can be deducted 100% the year they are bought under Section 179 of the tax code.
What do business owners need to know about nonpassive income and losses?
Nonpassive income and losses are usually declarable and deductible in the year they are incurred. However, to take them the taxpayer must annually and actively participate for more than 500 hours in the business venture (100 hours if no one else in the business works more than that). Other income can also qualify, such as from investment portfolios and deferred compensation.Learn More: What Is Nonpassive Income and Losses?
The 83(b) election is a provision under the Internal Revenue Code giving an employee or startup founder the option to pay taxes on the total fair market value of restricted stock at the time of granting. It is subject to vesting and alerts the IRS to tax the elector for the ownership at granting rather than when the stock vests.
Business partners, S corporation shareholders, and investors in limited partnerships and certain ETFs use Schedule K-1 to report their earnings, losses, and dividends. K-1s are usually issued by pass-through business or financial entities that don't directly pay corporate tax on their income, but shift the tax liability (along with most of their income) to their stakeholders.
Tax Loss Carryforward
Tax loss carryforwards allow taxpayers to apply a taxable loss in a current period to a future tax year. Net operating losses occurred in business pursuits can be carried forward indefinitely as a result of the Tax Cuts and Jobs Act, but are limited to 80% of taxable income in the year the carryforward is used.
Created to encourage investment by small businesses, bonus depreciation lets businesses deduct a large percentage of the cost of eligible purchases the year they acquire them, instead of depreciating them over a period of years.
Federal Employment Tax Act (FUTA)
Due to the Federal Unemployment Tax Act (FUTA) any business with employees pays a tax on payroll; the revenue funds unemployment benefits. Employers who also pay their state unemployment insurance can receive a federal tax credit of up to 5.4%, resulting in an effective FUTA tax rate of 0.6%.
Despite the name, a franchise tax is not a tax on franchises. Instead, it’s a levy paid by certain enterprises that want to do business in certain states. Separate from federal and state income taxes, the amount charged varies and is not based on the company’s profits.
Payroll Deduction Plan
When an employer withholds money from an employee’s paycheck, that’s a payroll deduction plan. Voluntary deductions include healthcare, retirement savings, or life insurance premiums. Involuntary deductions include Social Security and Medicare, and can also be for child support payments or wage garnishments.