The information in this article is up to date for tax year 2024 (returns filed in 2025).
One of the most critical things you must do when running a small business is file and pay your business taxes. Small business taxes can be intimidating because, let’s be honest, the IRS is intimidating. Unless you’re a CPA yourself, chances are that taxes are not your forte. You might have your general bookkeeping under control, but are you ready to ensure that you realize all of the small business tax deductions you’re entitled to when it’s tax time? Let’s make certain that you are. After all, tax deductions mean more money in your pocket, and that means more overhead to grow your business. By understanding and utilizing all available deductions, you can achieve significant tax savings, which can be reinvested into your business.
Understanding Small Business Taxes
As a small business owner, it’s essential to know what taxes you need to pay, how to calculate them, and what deductions you’re eligible for. Small business taxes can be overwhelming, but with the right knowledge, you can minimize your tax liability and maximize your profits.
Small business taxes typically include income tax, employment tax, and self-employment tax. Income tax is the tax on your business’s profits, while employment tax is the tax on the wages you pay to your employees. Self-employment tax is the tax on your own earnings as a business owner. Additionally, you may need to pay excise tax, estate and gift tax, and other taxes depending on your business structure and location.
To understand small business taxes, you need to know your business structure and how it affects your tax obligations. Sole proprietors, partnerships, corporations, and limited liability companies (LLCs) have different tax requirements. For example, sole proprietors report their personal and business income taxes using the same form, while corporations are taxed separately from their owners.
Your Tax Obligation
It costs to run a company in this country and in your state and/or county and city, depending on where your business is located. You have your business income tax, employment tax, and excise tax, if applicable, among other obligations. Don’t view this negatively, however, as this tax fuels our economy. After all, the more customers who choose your local business rather than seeking what they desire elsewhere, the better for the local economy. So, kudos to you for running a business.
As you stare helplessly at the mounds of rules and regulations surrounding small business taxes, you might feel it’s better to shut your doors or stick your head in the sand and avoid your tax obligation. The latter is definitely not an option; it’s not worth the late fees, fines, and possibly jail time you might face for failing to file and pay your taxes. Small business tax preparation isn’t as difficult as it might seem, and you can move forward fulfilling your tax obligation.
Some basics to keep in mind are:
- Select your business structure, as this directly affects how you will prepare and file your taxes. You have the option of running a…
- Sole-proprietorship, which is an unincorporated business that one individual runs.
- A partnership is an unincorporated business run by more than one individual, where each partner contributes money and/or property, skill/labor, and realizes business profits and losses.
- S Corporation, which passes corporate profits, losses, deductions, and credits through the corporate shareholders for their individual tax returns. This being said, the S corporation must file an informational federal tax return annually.
- Limited Liability Company (LLC), whose structure is determined by your specific state.
- Corporation, which sells stock in the corporation to shareholders in exchange for money or property and files a corporate tax return.
- Your business structure also affects your tax structure and when you pay your taxes. For example, sole proprietorships and partners file and pay quarterly taxes, whereas S corporations and corporations are allowed to file their taxes annually.
- If you have employees, you must pay employment tax, including Medicare and Social Security. You must also submit W-2 forms to your employees annually for their tax filings. If you hire independent contractors, you must send them 1099 forms annually on income over $600.
- Keep track of your business expenses, as the costs to operate your business are deductible in certain instances.
These are just some of the things you must consider and do to prepare for filing your taxes with the IRS and your state and local governments. You have a range of tools available to help you file your business taxes, including your employment taxes. If you are a do-it-yourselfer, you can opt to use tax preparation software like ezTaxReturn. You can also hire a CPA or tax preparation company to stay on top of your business income taxes. Finally, the IRS and Small Business Administration offer guides to help small business owners file their taxes and stay on top of their federal obligations.
Small Business Tax Deductions
One of small business owners’ biggest mistakes is failing to claim every deduction to which they are entitled. Your bookkeeper should classify each deduction as a tax deduction so you can easily account for all of your deductions when it is tax preparation time. Applicable tax deductions reduce your tax liability, which means you will pay less in city, county, state, and federal taxes. You want your tax liability as low as possible.
Let’s list small business operations and costs that can be classified as tax deductions:
- Advertising/Marketing: Business-related advertising and marketing expenses can be deducted from your business taxes.
- Automobile Expenses: A business vehicle is deductible for tax purposes. If you drive your personal vehicle for business purposes, you can deduct mileage at the business rate.
- Bad Debt Loss: If you lent money from your business to a lendee and that lendee did not pay back the loan after you made attempts to collect it, you can claim the loan as a bad debt loss.
- Benefit Programs: Most employee benefit programs are deductible, and if you are self-employed, you can deduct the contributions you make to your retirement account(s).
- Business Insurance: Premiums paid for various types of business insurance, such as liability and health insurance, can usually be deducted from taxable income.
- Business Meals: Generally, 50% of qualifying meal costs can be deducted, while meals provided to employees or during business travel may be fully deductible.
- Business Taxes: Your business incurs taxes at the local and state level and these taxes are deductible on your federal business tax return. Real estate and sales taxes are also deductible.
- Deductible Business Expenses: Keep track of all deductible business expenses, such as employee benefits and communication costs, to lower your taxable income.
- Employee Gifts: If you give your employees holiday gifts, these are deductible. Please note, however, there is a value limit, so check that limit amount with the IRS.
- Entertainment: If you are entertaining clients, the expenses for the meals and events can be deducted. This being said, only a percentage of these expenses can be claimed.
- Freelancers/Independent Contractors: If you pay for freelancers and/or independent contractors, this is fully tax deductible.
- Home Office Deduction: If you use a portion of your home exclusively for business purposes, you may qualify for a home office deduction, which can include a portion of your rent or mortgage interest, property taxes, and utilities.
- Insurance: All insurance policies directly related to your business are deductible, including liability, malpractice, and property insurance.
- Inventory: If your business is inventory-based, you may be able to deduct the storage and production costs of the goods you sell or resell.
- Legal/Professional Fees: All legal and professional fees you pay for your business are business tax deductible.
- Loan Interest: The interest payments you make on your small business loan can be deducted from your business taxes.
- Office Furniture: You can depreciate your office furniture and equipment, as well as machinery, over a set time period on your federal income taxes.
- Office Supplies: All of your office supplies are tax deductible.
- Rental Property/Equipment: If you rent your business property or equipment, the lease or rental payments are deductible from your taxes.
- Salaries: You can deduct your employees’ salaries, commissions, and bonuses.
- Software/Magazine Subscriptions: Both of these business expenses can be deducted from your business taxes. This also includes subscriptions to periodicals.
- Travel Expenses: Your business travel expenses are tax-deductible. Note, however, that you must travel away from the city where your business is located.
- Utilities: Your business’s utility costs are deductible, including electricity, internet (sometimes limited), telephone, trash, and water bills.
You’re probably surprised that some of the items in the above list are tax deductible. By understanding small business taxes and claiming the right deductions, you can minimize your tax liability and maximize your profits.
How to Claim Small Business Tax Deductions
Claiming small business tax deductions is an essential part of minimizing your tax liability. A tax deduction is an expense that can be subtracted from your business’s gross income to reduce its taxable income. As a small business owner, you can claim various deductions, including business expenses, home office deductions, and charitable contributions.
To claim small business tax deductions, you need to keep accurate records of your business expenses. This includes receipts, invoices, and bank statements. You can claim deductions for business expenses such as rent, utilities, equipment, and supplies. You can also claim deductions for business use of your car, travel expenses, and meals.
In addition to business expenses, you can also claim deductions for home office expenses if you use a dedicated space for your business. You can deduct a portion of your rent or mortgage interest, property taxes, and utilities. You can also deduct charitable contributions made to qualified organizations.
To claim small business tax deductions, you need to file the correct tax forms. The most common forms used by small businesses is Form 1040. You may also need to file additional forms, such as Form 8829 for home office deductions or Form 8283 for charitable contributions.
It is important to take time when preparing your small business taxes so you ensure every I is dotted and every T is crossed. ezTaxReturn makes it fast and easy to prepare your small business taxes on your own. We guide you every step of the way to ensure your taxes are filed properly and within all tax rules and regulations. This helps to prevent a future audit.
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
