Small Business Tax Requirements & Benefits
By owning a small business, even just as a sole proprietor, you may be able to save money via small business tax benefits. This is in large part because, as a business owner, there are expenses which you may incur which can be deducted from your taxable income. Having said this, a business’s tax return can vary a great deal depending upon the legal structure of the business. For this reason, it may make sense to engage a professional tax preparer to assist with your small business's tax return.
Before preparing a return, you or your tax preparer will need access to your income information. This may include gross receipts, sales records, information about returns or credits, checking or savings account interest, and any other income that your business may have accrued. If you have inventory, you'll also need information on the cost of goods sold.
Just as important for small businesses are their expenses, which can cut down on the taxable income of a business. This in-turn, can decrease the overall tax burden. Here are a few examples of common expenses that can reduce a taxpayers overall tax burden:
- Housing expenses. If you work out of your home, you can expense the portion of your home that you use for work. This could be an office, a workshop, or even a space that you use for storage supply. You can choose to take a standard deduction at $5 per square foot, or you can deduct a percentage of your expenses based on the amount of space used for work. This percentage applies to rent or mortgage, utilities, cable, internet, and phone. It also extends to any other shared expense that affects that space, including home furnishings and repairs.
- Transportation expenses - When running errands for your business with a personal vehicle, the miles driven can result in a deduction which accounts for fuel expense as well as wear and tear.
- Eating out and travel - One half of the cost of business meals with clients and/or employees can deducted. Likewise, you can also deduct half of entertainment and/or food cost while traveling for business. The lodging and other travel expenses are often completely deductible.
If you are using a bookkeeping program, the program will most likely categorize expense information so that it may be quickly processed into your return. If you are not, a tax preparer may request bank records, receipts, credit card statements, as well as other records that provide expense information.
Small Business Tax Requirements According to the IRS
In order to have a valid business for tax purposes, your business must have a profit motive. It cannot simply be a hobby or other activity.
While it is true that you may be able to deduct business losses from your regular income (such as that earned from a full or part-time job), you must still try to make money from your business. Generally, the IRS will presume that you are in your business to make a profit if you have reported income from it three out of five years. If the IRS determines that a business does not have a profit motive, losses from it may not be used to offset other income.
Items such as maintaining a dedicated business bank account and registering the business with your local government are important for several reasons including demonstrating to the IRS that the business venture is real in case it is ever questioned. No matter what, you should always maintain strong records in the off-chance that you or your business is ever audited or business status ever comes into question.