Updated October 1, 2021
Taxes can be complicated, and business taxes even more so. There are a variety of taxes that must be paid at different times. Naturally, many entrepreneurs have questions about business taxes. It’s important to understand the complex tax regulations and financial responsibilities that come with running a business.
Top 12 Questions Entrepreneurs Have About Business Taxes
- When Are Business Taxes Due?
- How Do You Get a Business Tax ID Number or EIN?
- What is My Business Tax Rate?
- How Does the New Tax Law Impact My Business Taxes?
- Who Has to Pay Estimated Taxes and When?
- What Form Do I Use to Report Business Income?
- What Small Business Tax Deductions Can I Claim?
- Can a Small Business Get a Tax Refund?
- How Do You Claim a Business Loss?
- Where Can I File Business Taxes?
- What if You Owe the IRS?
- Why Do I Need a Professional Tax Attorney?
Business taxes can be confusing and complicated. A company may be responsible for a variety of taxes such as income, employment, excise, property taxes, self-employment, and estimated taxes. Employment and self-employment taxes include Social Security and Medicare taxes. You also may be responsible for state and local taxes. The Internal Revenue Service (IRS) oversees federal taxation and provides information to help explain business tax codes.
1. When Are Business Taxes Due?
Generally, a business must file their taxes on the 15th day of the third month after the end of the tax year. The income and losses from some businesses pass through and are taxed on the owner’s tax return, which is due around April 15th each year. Companies that follow a calendar tax year (January 1st to December 31st) usually need to file by March 15th.
While some businesses must use a certain tax year, the alternative to the calendar tax year is the fiscal tax year, which can start anytime. A company following the fiscal tax year would file their taxes on the third month after the year-end, by the 15th day. For example, a corporation that elects to start a tax year in September would file taxes within three months, which is December 15th. Filing small business taxes for the first time as a corporation is a common way to establish your fiscal tax year.
Estimated taxes are due on income that does not have tax withheld, such as with payroll taxes. Business owners, self-employed individuals, freelancers, and some investors may be required to file estimated taxes quarterly or every three months (by the 15th day of the fourth month). January to March payments would be due by April 15th.
Failure to pay taxes on time can result in fines and penalties which can quickly add up. Companies may also need to pay excise taxes on the sales of certain goods or services. Your company may be responsible for other small business taxes and due dates, which is why it is always a good idea to consult with a tax professional.
2. How Do You Get a Business Tax ID Number or EIN?
A business tax ID number or Employer Identification Number (EIN) may be required for your business. They are offered free from the IRS and are used to identify your company on many important documents. You may need to use your business EIN when reporting withholdings, filing deposits, and paying employment taxes–as well as including it on forms given to employees and Social Security Administration (SSA).
You can apply for an EIN online through the IRS website at no charge and can usually receive an immediate response. The IRS also allows for EIN applications by mail, fax, and phone. Businesses that indicate they will have employees on their EIN application will be automatically enrolled in the Electronic Federal Tax Payment System (EFTPS).
3. What is My Business Tax Rate?
Tax rates for small business startups and companies depend on the business structure. There are many different business types, each with its various advantages and disadvantages. These business types include sole proprietorship, partnership, limited liability company (LLC), S corporation, C Corporation, and more. Sole proprietors are when the owner and the business are considered the same. All business profits and losses are reported on the owner’s tax return.
Partnerships, some LLCs, and S-corps are all pass-through businesses, where the owner’s share of the company will be paid on their individual tax return. Because of this, the tax rate depends on the tax bracket based on income level. These tax brackets range from 10% to 37%. In contrast, C-corps–and some LLCs that elect to be taxed as a C-corp–are subject to double taxation. First, the corporation is taxed at the new flat rate of 21% and then any profit, such as dividends, are taxed again on each individual owner’s tax return.
4. How Does the New Tax Law Impact My Business Taxes?
The Tax Cuts and Jobs Act introduced many changes to taxation. The corporate tax rate was reduced to 21% and pass-through businesses like sole proprietors, LLCs, partners, S-corps–and even real estate investment trusts (REITs)–may be eligible for the new 20% business income deduction. In addition, the alternative minimum tax (AMT) was removed for businesses but not individuals. Instead, the income thresholds were increased to $70,300 for single filers and $109,400 married joint filers.
After these income levels, the AMT is phased in until the thresholds of $500,000 for single filers and $1,000,000 for married joint filers. Besides these changes, personal exemptions are temporarily suspended, the Child Credit was increased, and moving expenses can now only be claimed by active duty military on orders to a new duty station. Also, the state and local taxes (SALT) deduction is limited to $10,000 and bonus depreciation can temporarily be claimed in the first year.
5. Who Has to Pay Estimated Taxes and When?
Individuals who expect to owe $1,000 or more in taxes after withholdings and tax credits may be required to calculate and pay estimated taxes quarterly. Companies that expect to owe over $500 must do the same. If you owed estimated tax the previous year, you must make equal payments that will either be 100% of the tax shown from the previous year or 90% of the tax due for the current year. Estimated payments are due quarterly by the 15th day of the month after each three-month period.
Some businesses, such as farmers, have special rules to follow. Failure to pay, or underpayment of estimated taxes, can result in severe penalties. The IRS will calculate interest due quarterly, but that interest is compounded daily, which can quickly grow a tax debt.
6. What Form Do I Use to Report Business Income?
The business tax return forms required for reporting business income will vary, depending on the type of business you have formed, your business activity, and if you have employees. A pass-through business owner will have to report business taxes due on their personal IRS Form 1040. Sole proprietors and single member LLCs (SMLLCs) may also file a Schedule C with their 1040. Partnerships and LLCs taxed as partnerships report business income with IRS Form 1065, and the company sends each partner a Schedule K-1 to file on their 1040.
C-corps use Form 1120, while S-corps file Form 1120-S and send members a Schedule K-1. If you expect to pay estimated tax, you might us
e Schedule SE to calculate self-employment tax, 1040-ES to calculate Estimated Tax for Individuals, and 1120-W to determine estimated tax for corporations. Employers may have to use Form 940, 941, or even 943, and there are even more forms required for businesses subject to excise taxes. Local business taxes may require unique state and local tax forms.
Due to the complex nature of taxation, it’s important to consult with a tax professional to ensure you are filing all the required forms and documentation.
7. What Small Business Tax Deductions Can I Claim?
Business can claim a variety of tax deductions. These include deductions for benefits passed on to employees, such as offering qualified parking, reimbursing employees for travel and other expenses, and retirement plans. In addition, companies can deduct or amortize start-up costs over many years and take bonus depreciation for organizational expenses. In case of an audit, it is important to log expenses and keep receipts in order to prove the deductions being claimed. To this end, it is vital to keep your business accounts separate from personal accounts. Failure to separate accounts can make it harder to enforce limited liability, if applicable.
A small business owner can claim deductions for a home office, vehicles, and travel to meetings and other business events. Be careful when claiming some small business tax deductions, like your home office, as they can have very detailed rules. Even meals for business purposes are 50% deductible, such as when taking a client to lunch or when an employee eats while traveling for business. Trump’s recent tax act reform did eliminate deductions for business-related entertainment expenses related to clients or customers. However, you may still be able to claim the deduction on some entertainment expenses for certain employees. You may be eligible for rental property deductions. Depreciation can also be claimed on property used for the business. However, depreciation can be tricky so it would be best to consult with a tax attorney to ensure you are deducting the correct amounts over the right years.
8. Can a Small Business Get a Tax Refund?
Some businesses may be able to get a tax refund. Most business types pass income through to the owners, who report the income or loss on their individual income tax return. Because of this, the business itself will not receive a tax refund, but the owner might. C-corporations and limited liability companies that elect to be taxed as a C-corp may be eligible to receive a tax refund. These company entities report their taxes to the IRS, and if an overpayment was made during that year, the balance after deductions and credits may be returned to the company in a tax refund.
9. How Do You Claim a Business Loss?
In some cases, when a business does not make any money, it may be possible to claim the losses to offset other income. After filing business taxes, some companies–especially small start-ups–may not earn any money for the first several years. When tax deductions exceed taxable income, a net operating loss (NOL) is reported.
One method of encouraging small business growth is to allow for losses to be claimed on taxes. Sole proprietors, partners, and members of an LLC or S-corp may report business losses on their personal tax returns to offset other income sources. If the loss exceeds all reported income, you may be able to carry the loss back to previous tax years in order to obtain a refund from that year as well. Further losses may be applied to future tax years.
While C-corp shareholders cannot claim business losses, the corporation can on its tax return. Generally, a net operating loss may be carried back two to three years and carried forward 15 to 20 years. It is important to note that “at-risk rules” limit the loss that can be claimed. Properly reporting a business loss on taxes can be complicated, and it’s a very good idea to consult with a competent tax lawyer.
10. Where Can I File Business Taxes?
The IRS allows you to file business taxes online and payments can be made through the Electronic Federal Tax Payment System (EFTPS). You can find publications and information on how to file taxes through the IRS website. You may also file by mail or through a third-party tax preparer, who may submit the forms and payment to the IRS on your behalf. You may be required to file state and local taxes in accordance with their laws and regulations.
11. What If I Owe the IRS?
Some business owners may end up owing the IRS, state, or local government. For example, this can happen from underpayment of income tax, missing or late tax payments, or not paying enough estimated taxes. The IRS may file a placeholder tax return on your behalf to determine the tax amount owed. If you receive a tax bill from the IRS, it is vital to act as soon as possible because interest and penalties are applied and compounded.
Make sure to review the business and personal tax returns to verify the amount owed. An IRS tentative return filed on your behalf may not include all of the deductions and credits you can claim. Consider the aid and tax advice of a professional lawyer to help you negotiate with the IRS. You may be able to work out a payment plan or decrease the amount owed. If a debt remains unsettled, the IRS has the power to place a lien on business or personal property, and eventually, they can levy or seize those assets to settle the tax bill. Talk to a tax professional about ways to minimize your end of year tax liabilities.
12. Why Do I Need a Professional Tax Attorney?
There are many benefits of hiring a tax attorney. They ensure your business taxes are filed correctly with the most deductions and credits for which you are eligible. Taxes are complicated and tax law changes frequently, so it is easy to make costly mistakes. Tax professionals regularly review the most up to date tax information and have experience working with business and individuals on their taxes. They know the timeframes when certain forms and taxes are due, as well as ways to negotiate with the IRS on your behalf. Tax professionals also know how to navigate the appropriate appeals processes with their unique deadlines. In addition to these benefits, a tax attorney can help you strategize your tax plan and with cutting business taxes using legally approved methods.
Understanding Business Taxes
There are many rules and tax laws affecting entrepreneurs. Different businesses may pay taxes at different times during the year. If you have–or plan to have–employees, you will need to obtain an EIN. Your business tax rate depends on your business entity and is impacted by the new tax reform introduced by the Trump administration.
Many businesses are responsible for paying quarterly business taxes as well as monthly business taxes. The tax forms required for business taxes depends on the company structure, whether they have employees, and the nature of the business. Taxes also depend on state and local governments.
There are a variety of deductions that business can claim. If the deductions and credits exceed income, the business owners, or a C-corp, may be eligible for a tax refund. In the case where losses are accrued, these losses can be used to offset other income, even to past or future tax years. You can file taxes online through the IRS, by mail, or through a third party–such as a tax preparer.
If you end up owing the IRS, it is important to remember that you have options. The sooner you act, the better your chances. Reach out to Acadia Law Group today for more information on how we can help you with your business taxes.