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Small Business Tax Tips

Business Structure- several options with varying tax and liability pros and cons

Details from Please get advice from your attorney before setting up any entity, this is just an overview for your information:

  1. Sole Proprietorship – Simplest structure, single owner/operator with no distinction (or protection) between the business and the owner. The owner receives all the profits, but is personally responsible for all of the business debts, losses and liabilities. Owner reports income and expenses on Schedule C of the owner’s personal 1040 return

  2. Limited Liability Corporation (LLC) – Hence its name, members are protected from personal liability for business activities, debts and losses. Most states allow it to be single or multiple members/owners. Net income/losses are passed through to members to report on their individual tax returns which may be subject to self-employment tax. Single member LLC can report income/losses on schedule C of their personal tax return without having to file a separate return for the business. Multiple member LLCs prepare partnership or corporate return and members report their portion of income/losses on their personal 1040 return. Some states levy additional franchise taxes.

  3. Cooperative – owned by user-owners who share a common need and share services (ie: credit union and rural utilities). Also a pass-through entity and could qualify to be federal tax-exempt, but more complicated to organize and start up.

  4. Corporation (C corp) – independent legal entity owned by shareholders who buy stock in their company. Corporate profits are taxed as well as dividends paid to shareholders and capital gains when a shareholder sells its stock. May also be subject to state franchise taxes. Shareholders liability is usually limited to their investment in the company. Much more complex than other entities, but may be suitable for larger businesses.

  5. Partnership – multiple owners contribute to all aspects of the business. General partnerships divide profits, liability and duties equally. Limited partnerships (LP) limit liability, but also their input in the management decisions. Joint venture is a general partnership for a specific project or time period. Pass-through entity - profits and losses taxed on partners’ personal returns. Partnerships are not usually subject to state franchise taxes.

  6. S Corporation (S corp) – pass-through entity that avoids double taxation of tradition C corp and “are considered by law to be a unique entity, separate and apart from those who own it” limiting liability of the owners. Any shareholder who works for the company must be paid reasonable salary which is subject to employment taxes, but net income distributed to shareholders is not subject to self-employment taxes like an LLC. An LLC can elect S corp tax status. S corps could be subject to state franchise taxes.

  7. Non Profit Organization – there are no owners and profits are used to achieve their goals. Non Profits can apply for tax exempt status if their goals are charitable.

Retirement Plans - maximize retirement savings and tax deductions; however, the options can be confusing, here are some details to compare and then you should discuss with your accountant or financial planner:

  1. Simplified Employee Pensions (SEP) - Employer makes same percentage contributions to SEP IRA for each employee. Max annual contribution limit is 20% of net business earnings or 25% of W-2 earnings up to $52,000. Deadline to contribute is employer’s tax deadline including extensions.

  2. Savings Incentive Match Plan for Employees (SIMPLE) – For businesses with 100 employees or less. Employees earning at least $5000 are eligible to participate. Employees can contribute up to 100% of their income up to $12,000 (plus $2500 catch up if age 50 or more). Employers must contribute either by matching up to 3% of compensation or making 2% of compensation contribution to all employees eligible to participate regardless of whether they are. Deadline to contribute is employer’s tax deadline including extensions.

  3. 401(k) – Employees can defer up to $17,500 of their annual salary (plus $5500 catch up if age 50 or more). Employers can match employee contributions. Employee and Employer contributions can not exceed 100% of compensation up to $52,000. Special nondiscrimination rules apply to contributions and matching – most employers use a third party administrator to ensure compliance.

  4. IRA or ROTH – maximum annual contribution is $5500 (plus $1000 catch up if age 50 or more). Individuals open this account for self, employer has no role. Must have earned income or spouse has earned income. Deadline to contribute is April 15th. IRA contributions are tax deductible and taxed upon withdrawal. ROTH contributions are not tax deductible, but withdrawals are not taxed so gains and interest earned are never taxed under current tax laws

  5. Common Small Business Tax Deductions

  • Home office–You can deduct a percent of mortgage/rent, utilities, insurance, etc. based on size of your office. IRS says this space must be regularly and exclusively used for your business.

  • Insurance –E&O, health, business life, disability, long term care premiums can be deductible.

  • Legal and professional services – accountant, lawyer, financial planner (2% floor does not apply if business-related)

  • Office Expenses – supplies, rent, utilities, parking, business phones, software, subscriptions, education, etc. (new rules for supplies expected to last more than 12 months). Open a business credit card and checking account to keep business expenses separate from personal.

  • Furniture & Equipment – different rules apply so have your accountant figure out what you can deduct and what you have to depreciate. Either way, keep track of those expenditures so you can get the tax deduction.

  • Meals and Entertainment expenses– 50% of business-related meals are deductible

  • Travel – hotel, airfare, rent car, etc are deductible (50% on meals still applies)

  • Car- calculate how much you use your car for business and deduct that percent of gas, repairs, maintenance, loan interest, insurance, etc. Lease payments for business car are generally deductible. Mileage records are required to be maintained- use your calendar to keep track of business mileage. Either percent of actual expenses or standard mileage rate at $0.56 per mile are deductible, but you have to stick to same method for life of car.

  • Employ your spouse and child – not just in name, must be real employment. Beware of kiddie tax!

In sum, track all your business expenses to ensure you get the most deductions possible. Ask your accountant if you aren’t sure about a business expense so you don’t get in trouble if you get audited.

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