How to Navigate Tax Laws for Small Business Startups in 2023
Navigating tax laws as a small business startup requires careful attention to detail and an in-depth knowledge of evolving rules. Hiring an experienced tax professional can ensure your company remains compliant.
Many states require businesses to pay sales taxes and excise taxes, in addition to making estimated tax payments.
1. Taxes on Pass-Through Entities
Pass-through entities enable businesses to avoid double taxation. Instead of paying corporate taxes at the entity level, profits from pass-through businesses are passed directly through to owners and reported with their personal income tax returns.
Small businesses benefit greatly from choosing this structure because it allows them to avoid the vast array of rules and reporting requirements that accompany owning a C corporation, along with the 21% business tax C corporations are subject to before they distribute dividends to shareholders.
Tax deductions can help significantly lower your tax liability if eligible; however, regulations change often and working with an experienced certified public accountant (CPA) is vital to ensure you’re meeting all the rules. An experienced CPA will ensure your business reaps maximum benefit available to it; including properly calculating depreciation and claiming its full amount; taking time to learn this complicated tax code will save money in the long run.
2. Taxes on Partnerships
Business owners must also pay state income tax. Rates vary between states, from 2.5% in North Carolina up to 11.5% in New Jersey. Pass-through entities located in states with individual income taxes report their profits through Schedule K-1 on their personal 1040 returns.
Tax deductions can help new businesses save money. For instance, businesses that purchase assets such as vehicles, computers and equipment may claim 100% bonus depreciation in their first year of ownership.
Business bad debt deductions provide small businesses with another key tax advantage, allowing them to deduct the costs associated with accounts receivable that remain uncollectable after collection efforts have failed. Claiming this deduction requires following specific IRS rules that may require documenting the bad debt. Furthermore, it’s crucial that filing deadlines vary based on entity type and tax method – this is something a certified public accountant can assist with in such matters.
3. Taxes on S Corporations
S corporations provide the best of both worlds: legal protection against liability while taking advantage of tax savings. Like LLCs, S corporations are pass-through entities which don’t pay corporate taxes while still permitting owners/principals to protect personal assets against business creditors or lawsuits filed against their company.
S corporations must meet specific criteria in order to take advantage of this special tax treatment, including having 100 shareholders who are individuals or trusts, adhering to state corporation law regarding meetings and record keeping, as well as adhering to any special state regulations that may exist for this type of entity.
S Corps must file annual federal returns using Form 1120S and report profits, losses, deductions and credits on this tax return by the third month after their fiscal year (usually March 15 for companies that follow a calendar year). Furthermore, depending on where they operate they may also need to pay sales and excise taxes in their states of operation; rates depend on which goods were sold and type of service offered.
4. Taxes on Sole Proprietorships
Filing business income tax returns can be an extremely time-consuming and daunting process, but with proper planning and an awareness of available tax deductions based on qualifying expenses it can become much less challenging.
If your startup is a sole proprietorship or LLC with only one owner, filing taxes should be simple using Form 1040-Schedule C. For partnerships with two or more owners, filing Form 1065 must be used instead, reporting profits and losses according to each partner’s share of net business income.
Startup businesses can deduct certain bank account and payment processing fees as small business expenses, though personal bank account or wire transfer services cannot. You will also owe state employment taxes that vary by state such as worker’s compensation, unemployment insurance and Medicare taxes as well as franchise taxes in some instances.