Understanding Small Business Taxes Is Critical to Success

Understanding small business taxes involves understanding the positive factors of owning a business as well as the mechanics of business small business taxation and collection. Other than general American entrepreneurial spirit, the primary driver for owning a business is maximization of income while minimizing the tax bite.

Understanding small business taxes advantages.

For decades, the tax code has been structured to encourage small business startups. Small business is still the single largest employing body in this country. Though many would argue that taxation burdens are increasing on small business, there are still many reasons to go into business other than just the freedom to chart your own income course. You can also funnel income into vehicles designed to fund a comfortable retirement.

The many expense deductions available to business include those that can enhance your personal lifestyle and tax situation as well.

  • Office expenses, including the physical office space costs as well as office supplies, utilities, and other valid expenses of office operation.
  • Production materials, supplies, and expenses involved in creating products for sale in the business. Examples include every part, material, or component used in the making of anything for sale from jewelry to car parts.
  • Supplies and materials used in the provision of services to customers of a service business. Examples include cleaning supplies, brooms, mops, vacuums, etc. that a home or business cleaning service would use.
  • Wages and salaries of all employees, including the owner if the business is properly structured for it.
  • The cost of employee benefits. While just the direct wages and salaries are the easy part of understanding small business taxes, there are ways to structure benefits for more tax benefits.
  • Retirement plans and understanding small business taxes benefits from properly structured plans is of immense benefit currently and in retirement of the owner(s).
  • Expenses of purchasing and operating vehicles for business use.
  • Costs incurred in closing the purchase of real estate used in the business.
  • Mortgage interest on real estate.
  • Interest paid on all business debt.
  • Depreciation of the value of business real property structures over time. This annual deduction of a portion of the structure’s value is great, as it is not cash out of pocket in the tax year of the deduction.
  • All other expenses valid for the operation of the business are deductible against income for taxes.

The benefits of owning a business do include tax benefits like these, but for most entrepreneurs the biggest benefit is more control of their financial futures.

Understanding small business taxes on the payment side.

After all those business deductions, your net income is subject to taxes based on the structure of the business. An overview of this taxationi:

  • Business Structure Taxation
  • Sole proprietorship – This is a pass-through entity, meaning that the profits of the business pass through to the owner(s) with no taxation at the company level. The owners pay taxes on that income at the personal level.
  • Partnership – This is also a pass-through entity, with profits passing through for reporting on the partners’ individual returns.
  • LLC, Limited Liability Company – This is a hybrid type of partnership that reduces the liability of the owners for operations of the business. However, taxes are handled as in a pass-through entity.
  • Corporation – This business entity is “double-taxed,” in that it is taxed at the company level and the shareholders are taxed on distributions to them of profits.

Those are the basics of understanding small business taxes but consult with tax experts like those at Taxhive.com for the details to take maximum advantage.

i Business Taxes – IRS.gov

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