As a small business owner, filing business income taxes is one of many crucial tasks you need to complete. You must prepay your taxes each quarter of the tax year — which means you must gather your tax records and documentation to fill out the proper forms and documents you need and send them in — to avoid the risk of an Internal Revenue Service (IRS) audit and the many complications that accompany that process.
The exact forms you need to make sure you’re properly filing your small business income taxes depend on your business structure, but here is a little more information about a few of the most common:
- Sole Proprietorship
You must fill out Schedule C, Profit or Loss from Business, to fill your business income taxes. The IRS also requires you to attach Schedule C to your individual income tax return.
Your business and involved partners must report profits and losses to the IRS. It must fill out Form 1065, U.S. Return of Partnership Income, and provide each partner with Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. Each partner uses schedule K-1 to file its taxes individually.
If you have a corporation, you must fill out Form 1120, U.S. Corporation Income Tax Return.
Those with S-Corporations fill out Form 1120-S to file business income taxes.
- Limited Liability Company (LLC)
LLCs require a different form depending on how your business is set up. If you are taxed as a corporation, you must use Form 1120. In other cases, you will need to file Schedule C or Form 1065.
You can download the forms you need from the IRS website, but should always contact a trusted tax advisor with any questions about your small business tax to ensure you don’t make any costly mistakes.
Defining Small Business
Knowing if your company really qualifies as a small business can be tricky. The Small Business Association (SBA) designates which are small based on the number of employees or annual revenue, but no exact formula exists because the employee and revenue threshold varies greatly among industries and can change from year to year.
Here are some examples of size and revenue standards for different industries in FY2009:
- Agriculture — up to $750,000 in average annual receipts
- Construction — up to $36.5 million in average annual receipts
- Manufacturing — up to 500 or 1,500 employees, depending on the subsector
- Real estate — up to $7.5 million or $32.5 million in average yearly receipts, depending on subsector
The SBA “small” distinction does not influence your business income taxes, however. Business income tax rates rely on company structure and revenue or receipts. For example, all corporations must pay income taxes at a flat rate of 21 percent as of September 2020.
Sole proprietorships, LLCs, and other types of businesses are “pass-through entities” that do not pay business income tax. The income passes through the owners, who must pay taxes on their personal tax return. Depending on the exact business structure, tax rates can vary from 13 percent to 37 percent.
Income Tax Deductions and Credits for Small Businesses
Several factors can impact your income tax bill, such as:
- Income Tax Deductions
Small business owners can take many deductions to lower their taxable income, thereby reducing their income tax liability.
- Income Tax Credits
The government offers a variety of tax credits for small businesses that reduce your taxes.
- Net Operating Losses
Businesses that lose money can deduct a certain amount from their income and also can carry the deduction forward to another year.
Learning more about how to reduce your small business’s income taxes could mean a world of difference in your revenue in years to come.
How to Reduce Small Business Income Taxes
As a small business owner, your goal is to reduce your income tax liability as much as possible so you have more money to invest in your operations. You cannot evade taxes or commit fraud, though, so you need to learn how to take advantage of the deductions and credits available to small business owners. These tax benefits can greatly impact your bottom line and reduce your tax burden.
It’s important to keep your personal and business expenses separate so you can deduct as many of the latter as possible. You can legally deduct any necessary and ordinary business expenses if they are for reasonable amounts. Some examples include:
- Banking fees
- Marketing and advertising costs
- Computer and software purchases
- Office supplies and expenses
- Depreciation of business assets like computers, cars, trucks, machinery, etc.
- Mileage deduction for driving your vehicle for business use
- Health insurance if you are self-employed or provide coverage from employees
- Self-employment tax deduction that subsidizes part of the Medicare taxes and Social Security taxes you pay for yourself
- Home office deduction when you exclusively work in a dedicated home office
- Business travel and meals
- Small businesses that employ others can deduct employees’ wages and benefits
Pro Tip: As of 2018, most small businesses structured as pass-through entities can deduct 20 percent of their profits to reduce their taxable income. That deduction begins to phase out if you are single and your income exceeds $157,500, or $315,000 if you are married and filing jointly, however.
Unsure How to File Your Small Business Income Taxes?
Federal and state tax codes are complex — especially in business income tax filing. Making correct tax payments on-time is crucial to avoiding penalties or dealing with an IRS audit, and consulting with a trusted tax advisor who knows tax law can help you save a ton of time and money. Don’t roll the dice if you’re unsure how to file your small business income taxes, because the result could be detrimental to your operations.
Are you ready to reduce your small business income taxes? Contact Silver Tax Group today to discuss your questions about the process, or to get assistance with business income tax planning and any other tax-related questions you might have.