If you own your own business, your tax obligations likely do not end with the IRS. There are other tax agencies looking to put the bite on you as well. Small business owners can cut their taxes by taking various tax deductions. Be sure you don’t pay more taxes than you need to by being aware of the overlooked tax considerations for small business.
Overlooked Tax Considerations for Small Business
The federal government puts the biggest tax bite on small business. You’ll need to pay the IRS:
- Income taxes on your net income.
- Your individual Social Security and Medicare taxes.
- Payroll taxes if you have employees. This includes income withholding, and employee Social Security and Medicare taxes.
Yet, you may also have to pay state various state taxes, sales taxes, and/or local taxes.
State income taxes
Most states impose income taxes on business owners. The exceptions are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee impose income taxes on dividend and interest income only. Unless you’re in one of those non-taxed states, you’ll likely have to withhold state income taxes from employees’ paychecks.
Almost all states and many municipalities impose sales taxes of some kind. The only states without sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon.
All states that have sales taxes impose them on sales of goods or products to end users. You probably don’t have to worry about sales taxes if you provide services to clients or customers. Most states don’t tax services at all or only tax certain specified services.
Some exceptions are Hawaii, New Mexico, South Dakota and West Virginia. These states have sales taxes on all services, subject to certain exceptions.
If you are subject to sales taxes, you’ll have to fill out an application to get a state sales tax permit. Many states impose penalties if you make a sale before you get a permit. Generally, you pay sales taxes four times a year, but you might have to pay them monthly if you make lots of sales.
Other state taxes
Various states impose a hodgepodge of other taxes on businesses.
- Nevada imposes a modified business tax on businesses with employees.
- Hawaii imposes a general excise tax on businesses based on the gross receipts they earn.
- Washington state has a business and occupation tax on the gross revenues of all businesses.
Your state tax department can provide more information on these or other taxes you may face.
You might also have to pay local business taxes to federal and state taxes. For example, many municipalities have their own sales taxes which you may have to pay to a local tax agency.
Some cities and counties also impose property taxes on business equipment or furniture. You may have to file a list of such property with local tax officials. You’ll also have to include the cost and depreciation information.
Some cities also have a tax on business inventory. This is why many retail businesses have inventory sales. They want to reduce their stock on hand before the inventory tax date.
A few large cities—for example, New York City—impose their own income taxes. Some also charge annual business registration fees or business taxes.
Your local chamber of commerce is a great resource for information on local taxes. You can also contact your local tax department.
Overlooked Tax Deductions for Small Business
The best way to keep your taxes as low as possible is to take every deduction to which you are legally entitled. Unfortunately, many small business owners overlook valuable tax deductions. They end up overpaying their taxes.
Make sure you don’t overlook the following tax deductions for small business owners.
Home telephone expenses
You get no deduction for a single phone in your home. Yet, you may deduct the cost of long distance phone calls and special phone services you use for business such as call waiting or message center. You may deduct the full cost of a second phone line you use at home for business, including a cell phone.
Gifts you buy for clients are deductible as business expenses. Remember, this deduction is limited to $25 per person per year. Yet, the $25 limit applies only to gifts to individuals. It doesn’t apply if you give a gift to an entire company. Such company-wide gifts are deductible in any amount, as long as it is reasonable.
Continuing education courses
You can’t deduct the education expenses you incur to qualify for a new business or profession. Yet, you can deduct the cost of continuing education courses you must take each year to maintain your license. For example, a real estate broker could deduct the cost of continuing education courses for real estate. Education that improves your knowledge and skills in your business is also deductible. For example, a real estate broker can deduct the cost of a webinar on how to use social media to find sales prospects.
Tax preparation fees
You can deduct the cost of hiring a tax professional to prepare your business tax return. If the same tax pro prepares your personal and business return, you can deduct only the cost of preparing the business part. Make sure that you get an itemized bill showing the part of the tax preparation fee allocated to your business.
ATM fees, credit-card fees, and interest
You can deduct ATM fees, credit-card fees, and other bank charges you paid during the year for all your business accounts.
Business-related subscriptions—for example, to trade publications—are deductible.
Greeting cards you send to clients and sales prospects are a deductible advertising expense.
You can deduct the cost of designing and maintaining a website you use for business. You can also deduct your Internet hosting fees and the cost of obtaining a domain name for your business.