Term Paper on "Small Business Tax Season Tips and Strategies"

Term Paper 5 pages (1408 words) Sources: 2

[EXCERPT] . . . .

Small Business Taxes

Small Business Tax Strategies:

How to Be Prepared from Day One

With the constantly changing tax code and the dizzying amount of paperwork often involved in filing taxes, it is no wonder that tax season is regarded as a time of stress and misery. This is especially true for the small business. Figuring out what forms need to be filed when and what money needs to be sent where can be mystifying, yet an error can cost your business both financially and legally. While tax season will never be a time of celebration, there are some strategies and tips that will help it go smoothly and will ensure that you and your business remain on the good side of the IRS.

Start off on the Right Foot

The way your business's taxes will be filed depends largely on the type of business entity you are. Putting the necessary thought into whether and how to incorporate your small business can make navigating your tax liability much easier.

Businesses set up as sole proprietorships, partnerships, or limited liability companies do not file business taxes per se, since any income received by the business is filed as personal income. In the case of partnerships, sometime referred to as "pass-through entities," federal filing can be a bit more complicated; you must file an information form with the IRS stating the income of the business as a whole so that the IRS can ensure that all partners claim their individual income properly. (Fool 2010, para.4)

The decision to incorporate should include some careful consideration of tax liability. Standard incorporation, in which the business is its own tax entity requiring its own income tax return, can leave you open to double taxation unless you take the appropriate corporate deductions. Too avoid this, many small businesses elect to file as a subchapter S corporation, which allows them to be treated as a pass-through entity with the only additional federal paperwork being an information form. (Fool 2010, para.5)

The type of business entity that you choose also impacts your state taxes. States have differing policies regarding how they tax different types of businesses, so it is always best to check state tax laws when determining your business entity.

Deductions

Deductions are the number one way that small business owners keep their tax liability under control. However, messy deductions without proper substantiation are also one of the most common reasons small businesses get into trouble with the federal government. Maintaining an organized system of receipt storage and being fastidiously honest in the reporting of your expenditures will keep you in the clear come audit time.

The recent economic stimulus package allows small business owners to deduct capital expenditures up to $250,000 (Akasie 2009, para.5). Many small business owners overlook deductions that could save them quite a bit of money. Keep in mind that all of the following are tax-deductible:

Educational Expenses: These MUST be related to maintaining or broadening skills applicable to your business.

Home Office Expenses: This can be a hefty deduction for those who work from home or maintain a home office, but it can also be fishing for an audit if it is not applied carefully. Any space solely devoted to your work can be claimed as a deduction, but the IRS is serious about the word "solely." A desk area that is used for work but is also used for children's homework or recreational web surfing is not eligible. If you claim this deduction, be prepared to prove that the space is used for work only. To determine the proper deduction, determine the square footage of your workspace as a percentage of the square footage of your home. You can then apply that percentage to your mortgage payments, rent, utilities, insurance, etc. (Dratch 2008, p. 1)

Office Supplies, Furniture, and Equipment: These expenses can be used to offset your taxable income, but it is imperative that you hold on to the receipts. For large purchases such as furniture and equipment, you can deduct 100% of the expense the year of the purchase, or you can deduct a portion of the expense over several years (depreciation).

Software Purchases: Recent changes to the tax code allow you to… READ MORE

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