Filing Taxes as a Small Business Owner

10/28/24 • 1 min

Filing taxes as a small business owner can be complex, but understanding the basics can make the process smoother. Depending on your business structure, you may need to file different types of returns. Sole proprietors and single-member LLCs typically file a Schedule C as part of their personal 1040 tax return. However, if you operate as a partnership, multi-member LLC, or corporation, you’ll need to file a separate business tax return. It’s crucial to report all income and all deductions accurately. This includes revenue from sales, services, and any other business activities. Deductions can cover a wide range of expenses, such as office supplies, travel, and advertising costs. Be mindful of filing deadlines. For most small businesses, the tax return is due by March 15th. If you need more time, you can file for an extension, which typically gives you until September 15th. However, remember that an extension to file is not an extension to pay any taxes owed. Also, keep in mind that income taxes aren’t the only taxes you might be subject to. Depending on your business, you may need to pay self-employment taxes, payroll taxes, sales taxes, and more. Consult with your CPA to ensure you’re meeting all your tax obligations and taking advantage of any deductions or credits available to you.

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Tax Credits vs. Deductions

Understanding the difference between tax deductions and tax credits is essential for effective tax planning. Tax deductions reduce your taxable income, which means their value depends on your tax rate. For example, a $1,000 deduction saves you $240 if you’re in the 24% tax bracket. Tax credits, on the other hand, provide a dollar-for-dollar reduction in your tax liability. So, a $1,000 tax credit reduces your tax bill by $1,000, regardless of your tax rate. This concept applies to both federal and state income taxes. Generally, tax credits are available for more specific categories of expenditures, such as education or energy-efficient home improvements, while deductions often cover broader categories like mortgage interest or charitable donations. Credits usually come with more eligibility requirements and often require additional forms and supporting documentation. Deductions, while still requiring proper documentation, tend to be simpler to claim. Consult your tax advisor to understand which deductions and credits you qualify for and how to maximize your tax savings.

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Tax Changes to Watch

As we look ahead to 2025, it’s important to be aware of significant tax changes on the horizon. Many provisions of the Tax Cuts and Jobs Act (TCJA), enacted in 2017, are set to expire at the end of 2025. Here’s what you need to know: First, individual income tax rates will revert to their 2017 levels. This means higher tax rates for many taxpayers. Additionally, the standard deduction will be cut roughly in half, and the personal exemption will return. The child tax credit will decrease, impacting families with children. The estate tax exemption will also be reduced, potentially affecting estate planning strategies. For small business owners, the 20% tax deduction for pass-through businesses will be eliminated. Another significant change is the removal of the cap on the state and local tax (SALT) deduction. This could provide some relief for taxpayers in high-tax states. For corporations, several temporary provisions will expire, including limits on deducting research and equipment costs and certain interest expenses. If these provisions are not extended, they will revert to pre-TCJA rules. It’s important to note that there will likely be legislative changes between now and then, which could alter these provisions. Staying informed and consulting with your tax advisor will help you navigate these changes and plan accordingly.