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  • Writer's pictureAntonise De Wet

Tax Tips for Small Business owners

The COVID-19 outbreak has left the economy in shambles. Only losing business and acquiring new clients rank higher in importance for 12% of small business owners than maintaining financial stability.



It should come as no surprise that taxes, a bill that appears at the conclusion of every fiscal year, rank as the second-most significant issue for US small businesses. Small businesses seek out opportunities to optimize credits and deductions and save money during tax season. According to David Ayoub, a CPA in Syracuse, New York, "one of the most neglected ways for small businesses to save at tax time starts at the beginning of each tax year." "It's easy. Observe all receipts. Find a way to organize all the loose receipts that are scattered on your desk, in your purse, and in your car. They may result in several deductions. The cash transactions that many small businesses make represent another simple deduction that is frequently overlooked. Ayoub continues, "Keep track of everything in a log."


Taxes are due by each and every small business owner in the US. Taxes are one of the largest expenditures of operating a retail store, while the actual amount you'll pay varies by state and business structure. The typical tax rate for small businesses is 19.8% of revenue. Taxes are not only one of the most significant payments, but also one of the highest corporate expenses. Small business owners that file their taxes incorrectly, incompletely, or late risk fines or, in the worst situations, criminal prosecution.


The positive news Taxes for small businesses aren't as complicated as you would imagine. Your tax liability can be legally reduced with the assistance of a certified public accountant (CPA), preventing you from facing a big charge at year's end.


Here are some Tax Tips for Small Business owners:


1. Understand financial jargon:

Many people believe that a new dictionary is necessary in order to comprehend their tax return. There are specific terms used just in the accounting industry. Learn some financial jargon to better comprehend the state of your company's finances.


Here is a brief explanation of various terminologies you may encounter on your balance sheet:

  • Revenue: The amount made from the selling of goods.

  • Cost of goods sold (COGS): The price of producing the goods that your company sells.

  • Gross profit: The amount that remains after COGS are deducted from total revenue.

  • Net sales: The amount of revenue remaining after all costs have been paid.

2. Look into tax benefits for small businesses.

As close to free money as you'll find is through tax credits. Tax credits give dollar-for-dollar reductions in your tax burden, making them one of the most efficient ways to reduce your small business tax cost. Let's say you owe $5,000 in taxes, but you qualify for a $2,000 tax credit. ($5,000 initial tax liability – $2,000 tax credit) leaves you with a final tax obligation of $3,000.


When you give your employees discounted health insurance or a retirement plan, you can be eligible for a tax credit. Discover the 10 small company tax benefits on our list.


The child tax credit and other personal tax credits can be used by owners of pass-through entities, such as sole proprietorships, partnerships, limited liability companies, and S corporations, to lower their tax obligations on business income.


3. Maintain precise records

Speaking of clean data, if you have correct records, tax season will go much more smoothly. To compare income and expenses with receipts or invoices, get your bank statements. Keep track of your expenses diligently. When you fail to enter a company expense in your accounting software, you're simply wasting money.


When business expenses are "ordinary and necessary," they are eligible for tax deductions. Therefore, whereas paying $100 for a rush-hour taxi to get to a business dinner would qualify as a business expense, throwing a birthday party for an employee's pet snail would not.Tax shields or deductions don't reduce your tax burden by the same amount as credits do. They instead reduce taxable income.


Based on your company's taxable income, which is the difference between revenue and deductions, you must pay business taxes. A crucial strategy for lowering your taxable income and, consequently, your tax bill is to maximize deductions. Consider a scenario where your company generates $100,000 in sales, $70,000 in deductions, and $30,000 in taxable income. Your tax obligation is determined by multiplying your effective tax rate, which varies depending on your income level, by $30,000.


Save the receipt, conduct some research, and consult a tax expert if you're not sure whether a cost qualifies as a business deduction.


4. Pay quarterly estimated taxes.

Small business owners who anticipate having an outstanding balance of more than $1,000 at the conclusion of the fiscal year are required by the IRS to make quarterly payments. By submitting Form 1040-ES on these dates, you can estimate your year-end tax liability and make contributions to your year-end accounts:

  • October 15

  • January 15

  • April 15

  • June 15

This is significant because business income that is passed through to your individual return is not taxed, according to Tim Yoder, a tax and accounting analyst at Fit Small Business. Payments for self-employment tax and income tax should be made quarterly by sole proprietorships that report business income on Schedule C.


5. Deduct your qualifying business income (QBI)

Qualified business income (QBI) deduction reduces taxable income by 20% for eligible taxpayers. The fact that you are not required to take any further steps to be eligible makes it the best self-employed tax deduction. All you require is a pass-through company.


The QBI encourages entrepreneurship by lowering the taxable income of business owners. The Ascent guide to the qualified business income deduction is worth reading.


6. Continuing losses

During their initial years of operation, small enterprises typically make a loss. When your company starts to turn a profit, you can use the net operating loss (NOL) deduction to reduce your tax liability.


When you started your company in 2019, it generated $100,000 in sales, spent $150,000 on operating costs, and generated a $50,000 NOL. Losses are exempt from income taxes, but in years when you make a profit, you can deduct up to $50,000 from your income.


You will pay income tax on $25,000 ($75,000 taxable income minus $50,000 NOL deduction) if your company subsequently earns taxable income of $75,000 in 2020.


7.Put money aside for payroll taxes.

You have a legal responsibility to report, withhold, and pay employment taxes as a small business owner who employs employees. There are numerous tax kinds for each employee to take into account:

  • Employers contribute half (6.2%) of employee wages into social security taxes.

  • Employers are responsible for paying half (1,49%) of an employee's Medicare tax.

  • Federal income tax: Variable based on the individual's salary and out-of-pocket expenses.

8. Deduct your home office expenses.

When you designate a portion of your home to your business and work from home like I do, you may be eligible for another special deduction. The home office deduction can be computed using one of two techniques. The simplest method is to multiply the area of your home office, which cannot be larger than 300 square feet, by $5.


Alternately, you can figure out the home office deduction by dividing qualifying home costs by the area of your house that is dedicated to running your business. 10% of allowable home expenses could be written off if your home office takes up 500 square feet of a 5,000 square foot house. The biggest caveat is that your home office cannot serve more than one purpose.


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