Small Business Tax Tips
Keeping track of small business finances can be a daunting task. Come tax time, many small business owners feel overwhelmed by their business taxes. Many business owners enlist the help of certified public accountants to get their taxes done correctly. These professionals can be of immense help. Even if a small business owner selects to hire a CPA, there are still some general points that he or she needs to understand about business taxes.
It is important to realize that different business structures are taxed differently. Sole proprietorships, corporations, and various partnership structures each have their own particular rules and regulations. For example, partnership entities in the US do not directly pay income taxes. Instead, the income made by a partnership is taxed once it has been passed through to the owners. A traditional C corporation, on the other hand, does have to pay direct taxes on income. Additionally, the owners of said corporation are still taxed on their individual earnings from the business. In a very real sense then, business owners who keep a C corporation structure instead of choosing an S corporation structure are taxed twice, which is not usually the best situation for small businesses.
Since different structures can result in drastically different tax levels, entrepreneurs should think very carefully about which structure to pick when first setting up their businesses. Entrepreneurs should familiarize themselves with the basic taxation differences between each type of business organization. A qualified attorney or accountant can then advise business owners on their final decisions.
Smart business owners should become familiar with the required local, state, and federal tax filing schedules for their businesses. Depending on how much income a business is bringing in or paying out, withholding taxes or sales and use taxes might be due biweekly, monthly, or just once per quarter. Although accountants usually take care of these documents themselves or at least remind their clients when forms are due, it still makes good business sense for owners to have the general tax timelines in their minds.
Perhaps the most important tax tip for a small business is to keep meticulous records. Entrepreneurs should record every expense and keep copies of every receipt. Business owners should also develop a logical filing system for all of this information. There are many computer software packages available that help small businesses keep track of their finances. Such programs are also usually capable of automatically generating tax forms, which can save businesses time and money.
Setting up a dedicated business bank account is also highly advisable to avoid any potential tax issues. Personal and business finances should never be mixed. Although it might be more convenient to put this week’s groceries on the company credit card, such an action can severely complicate an organization’s record keeping. Mistakes on tax forms are much more likely to occur if it ever becomes unclear which expenses are business ones and which are personal ones. In the case of an audit, such confusion can be very detrimental.