What do McDonald’s, Home Depot and Wal-Mart all have in common? These enormous corporations all started out as independently-owned and operated small businesses. Whether you have dreams of launching your own business or just aspire to make a living on your own, the best way to ensure success is by laying the proper groundwork essential to long-term small business growth. Filing taxes for your small business is part of the process, and for many, that moment appears to be just seconds away.
Choosing a Business Structure
Choosing a legal structure for your business is the first step before beginning even the simplest of tax calculations. Your business structure will help determine the level of legal protection you have and will guide your selection of required tax forms to use. Regardless of whether you choose to run a sole proprietorship, an S corporation or an L.L.C., federal taxes must be paid. Depending on the size of your organization and your filing status, you can do so either under your social security number, Individual Taxpayer Identification Number (ITIN) or through your Employer Identification Number (EIN is not a required ID for self-employed individuals or businesses with no employees).
Writing Off Small Business Expenses
Ultimately, if your business generates any type of income you must pay taxes. Cash, credit card sales, check transactions and barter trades are all parts of incoming revenue that needs to be reported. However, since you are running a business, that income is offset by your operating costs. There are tons of expenses involved will small business management, and many of them can be written off. The main categories for claiming these deductions include:
- Costs of Goods Sold: Consider if you are a jewelry reseller who purchases prefabricated wares and then sells the items for a profit. If you paid $15 for a necklace and then sold it for $30, subtracting the cost of goods ($15) from the total sales will provide you with $15 of income. The remaining portion needs to be claimed on your return.
- Home Office Deductions: Many small businesses start at home, and if you use yours as headquarters, a portion of your mortgage or rent can actually be written off as an expense. The key is there has to be a specifically designated space like a home office, for business purposes.
- Entertainment: Do you need to take a client out to lunch to seal the deal? Half of that expense can be written off as a deduction. Perhaps you plan on hosting a client holiday party, in which case half of those event expenses can be written off. If you buy yourself a cup off coffee however, you pay for that boost out of pocket and it cannot be claimed.
- Car and Truck Expenses: Do you use your vehicle to visit customers, make deliveries or for commuting? A portion of those costs (per mile) can qualify as an expense.
The type of paperwork you need to file varies on the business cash flow (1040-ES), whether there is a reportable profit of $400 or more (1040 Sch SE) or have employees.
State Taxes
Sales tax is handled on a state level (quarterly payments are the norm), while April 15 is the due date for filing small business tax forms to the Feds. Staying organized with proper documentation of your sales, profits, expenses and losses is imperative. New small business owners who are going through the tax filing process for the first time may become overwhelmed by the amount of detail required to accurately file a tax return. The IRS understands the need for education and provides free seminars, workshops and other mediums expressly for the need of small business owners.