Small Business Taxes
For entrepreneurs, one of the biggest issues with starting a venture is small business taxes. A small business may be subject to many different types of taxes, including state taxes and property taxes, but this short article is focused on concerns regarding federal income taxes.
Setting Up Your Small Business
First of all, note that the way you set up your business can have a tremendous effect on taxes. There are several choices before you as an entrepreneur regarding how to structure your business:
- Sole Proprietorship
- Limited Liability Company (LLC)
There are advantages and disadvantages to each type of business structure, which you should investigate fully before deciding on how to set up your business. At this stage, it is probably a good idea to consult an experienced attorney who has experience in setting up small businesses so you can be sure you’re choosing the right structure for your needs.
Small Business Expenses
One of the biggest issues that new small businesses owners face is knowing what is deductible on their taxes and how to claim such expenses.
Generally, a tax deductible business expense is anything that is “ordinary, necessary, and reasonable” for the operation of your business. The IRS defines this as any expense that is “helpful and appropriate” to running your business.
Yes, that’s quite broad, and indeed you are normally permitted quite a lot of latitude in deducting business expenses — with two caveats: (1) Make sure you have expenses documented (by receipts, preferably); and (2) Certain expenses are explicitly not deductible, e.g., driving tickets, bribes, work clothing (unless you are required to wear a uniform).
Current and Capital Expenses
As a small business owner, you must also be aware of the differences between current and capital expenses. Current expenses are everyday costs to your business such as office supplies; capital expenses are those that have value beyond one year and will continue to be useful for your business. Capital expenses must be written off over a certain period of years, although a computer purchased for your business is one big exception to that rule. You may usually deduct that fully in the year of purchase.
Beware of These Deductions
Two of the trickiest deductions to claim are the home office deduction and the deduction for qualified business-related entertainment. Both have very specific rules that apply to them, and the requirements may change from year to year. Take these deductions only after paying extremely close attention that you have met the qualifications and have proof to back up your claims. Why? Because these deductions are said to be “red flags” on tax returns that can result in auditing.