You may feel overwhelmed if you have more questions than answers about filing taxes. Maybe you aren’t sure if undocumented immigrants should file taxes in the U.S. or what type of taxes you owe depending on your business structure. That’s how we can help.
This article will help you understand why you need to file taxes as a small business owner and how to do it.
Why do small business owners need to file taxes?
With the exception of partnerships that submit information returns, all businesses must file an income tax return even when there’s no profit to report.
When you file taxes, you declare income earned, report expenses, take qualified business deductions and credits, and pay tax on any taxable profit. A tax return provides a permanent record of your business activities.
Business owners in the U.S. must stay compliant with the IRS or risk jeopardizing their business’s future. When you fail to pay the tax due on income or file taxes late, the IRS charges late-filing and late-payment penalties, interest, and possibly other penalties.
These aren’t one-time charges.
The penalties and interest continue until you pay your tax bill in full even if you apply for a short-term extension. In some circumstances, you could incur additional fines, sanctions, and possible jail time if the IRS determines you committed business fraud.
Can you pay fewer taxes?
By filing taxes for your business, you can reduce your taxable income substantially.
The IRS released the following business income deduction based on The Tax Cuts and Jobs Act passed in October 2017. Beginning in 2018, business owners are eligible to deduct up to 20 percent of qualified business income when operating as a sole proprietorship, partnership, S Corporation, trust or estate. There are limitations for taxable income exceeding $315,000 for a married couple filing a joint return and $157,500 for all other taxpayers.
The deduction is available to businesses whether you itemize deductions or take the standard deduction. Since the deduction may be subject to other limitations, it’s advisable to consult with a tax professional.
Here’s how it works. If your annual business taxable income is $100,000 and you qualify for the 20% deduction, you would only pay tax on $80,000. You could realize a significant reduction in the tax you owe.
Common business taxes depending on your structure
As a general guideline, here are common business taxes you may owe depending on how your business is set up.
This type of entity must pay corporate taxes and personal income tax when owners receive salaries, bonuses, and dividends.
Single-member LLCs are taxed as sole proprietors on their personal tax returns. Multi-member LLCs classified as a partnership pay tax based on their percentage of ownership and report any income on a personal tax return. Multi-member LLCs can also be set up as S Corporations and Corporations and are considered pass-through entities subject to individual tax rates.
- Sole Proprietorship
Individuals report sole proprietor business income on their personal tax returns by submitting Schedule C. The business’s profit or loss is combined with taxable personal income to determine the amount of tax due.
Corporation income tax is owed by the business on taxable income. Shareholders pay personal income tax on any dividends they receive.
Common small business tax deductions
All business structures can claim common tax deductions such as the ones listed below. It’s to your advantage to claim every deduction possible.
Depending on the deduction, you may need to submit a specific IRS form.
Don’t forget to keep an eye out for business tax credits like Disabled Access, Electric Vehicle, and Work Opportunity Credits which are subtracted directly from the tax owed.
- Business use of your home
- Continuing Education
- Interest paid
- Legal and professional fees
- Office furniture and fixtures
- Rent paid
- Safe-deposit box
Read Common Tax Deductions for Business Owners to learn how to reduce your taxable income.
Filing taxes isn’t hard when you know what to do
This article lets you know your responsibility regarding filing taxes. Additionally, it’s to your advantage to understand what your tax-filing requirements are depending on your business structure. Then come tax time, you’ll know how to proceed.
Helping business owners by providing pertinent information is one way Camino Financial fulfills its motto, “No Business Left Behind.” We provide financial resources like this post to come alongside you every step of the way and promote business growth.
If you ever need to apply for a small business loan, we’re specialists in matching the right loan to your business needs. First, we take time to get to know you and become familiar with how your business works. You work closely with a loan specialist so you understand your funding options and feel at ease about the loan process. After that, the loan process is quick and easy as most businesses receive funds within 2-4 days.