Tax Law Tips for Small Business Owners

Whether you’re about to launch your first business or you’ve been in business for years, it never hurts to brush up on tax laws. Reading up on tax law might not sound like anyone’s idea of a good time, but by learning the basics, you could enjoy appealing benefits such as significant tax savings and a lowered risk of IRS audits.

In this guide, an experienced tax attorney in Colorado discusses must-know small business tax tips.

Select the Right Business Structure

Choosing the right business structure sets you up for success right out of the gate. Picking the wrong one, on the other hand, could cause serious tax woes down the road.

There are quite a few business structures to choose from, including sole proprietorships, partnerships, and limited liability companies (LLCs). Sole proprietorships are ideal for businesses run by a single person. They’re easy to create and dissolve; however, creditors can go after your personal assets.

If you’re forming a business with one or more partners, you might want to choose a partnership. General partnerships are simplest, but all partners are responsible for any debt regardless of which partner caused the debt.

LLCs offer generous tax advantages and creditor protection. One drawback is that the IRS considers LLC members to be both owners and employees, which means they’re responsible for paying their own Medicare and Social Security taxes.

Keep Thorough Records

Part of your tax planning strategies should include keeping highly accurate records and implementing rock-solid business expense tracking. Not only can doing so help prevent business disputes, but it also protects you from an IRS audit. While keeping good records can be time-consuming, it’s far less of a headache than having to go through tax audit preparation.

Records to keep include copies of:

  • Contracts with employees, partners, customers, and suppliers
  • Sales receipts
  • Permits and licenses
  • Previous tax documents

Create Written Contracts and Agreements

In the good old days, simply solidifying an agreement with a handshake was enough. Today, though, you could end up in serious trouble without a written contract to back up your agreements.

Written contracts protect your business should the other party try to go back on their word. All contracts should include a list of each party’s obligations, as well as how to resolve conflicts should they arise.

Classify Employees Correctly

Ask any attorney for small business tax tips, and they’ll tell you that you absolutely must classify your employees correctly. Failing to do so could cost your business thousands in fines from the IRS.

You’ll need to determine whether your workers are employees or independent contractors. A worker is likely an employee if:

  • You have the right to control what the worker does or how they do their job.
  • You control the business aspects of the worker’s job (for example, who supplies their tools, how the worker is paid, etc.).
  • You pay them employment benefits, such as health insurance and retirement benefits.

If you’re not sure how to classify your workers, reach out to a tax center for guidance.

Make Quarterly Tax Payments

The IRS generally requires business owners to pay quarterly estimated taxes. It may seem unfair to pay taxes when you’re not fully sure what that year’s revenue, profits, and losses will be, but this is one task you don’t want to put off. If you don’t pay attention to tax deadline management, the IRS can slap you with an underpayment penalty when you file your annual return.

There are two main ways to estimate taxes and meet your legal tax obligations. You can either annualize or make estimated payments based on what you earned last year.

If you choose annualization, you make payments based on each quarter’s income. This is a good method if your income fluctuates substantially from one quarter to the next.

If you prefer to estimate payments based on the prior year’s earnings, take the amount of taxes you owed last year and divide the number by four. This method is ideal for those whose income is fairly stable each year.

Discover Tax Deductions That Can Save You Thousands

Business owners can take advantage of more than a dozen tax deductions and credits. For example, if you’re well-versed in small business tax tips, you probably already know that you can deduct business expenses. These may include:

  • Home office space
  • Business insurance
  • Business use of your car
  • Depreciation
  • Bank interest and fees
  • Phone and internet expenses
  • Moving expenses
  • Travel expenses

Here are some lesser-known deductions and credits that you might be able to take for your business.

  • Advanced Energy Project Credit: This credit is for businesses that invest in qualifying advanced energy projects.
  • Clean Vehicle Credit: You may qualify for this credit if you purchase a fuel-cell vehicle or electric vehicle for your business.
  • Energy-Efficient Commercial Building Deduction: This credit is for building owners who increase building energy efficiency by 25% or more.
  • Employer-Provided Childcare Credit: If your business offers childcare to employees, you’re eligible to claim this credit.
  • Work Opportunity Tax Credit (WOTC): This credit is for businesses that hire individuals who face barriers to employment, including very low-income individuals, people who have completed a rehab program, and formerly incarcerated individuals.
  • Employee Retention Credit (ERC): This credit provides relief to businesses that were financially impacted during the COVID-19 pandemic.

Pick an Accounting Method and Stick to It

Before launching your business, you’ll need to choose between a cash accounting or accrual accounting method. The main difference between these methods is timing. With cash accounting, you record expenses and revenue when cash related to those transactions is actually received. For accrual accounting, you record expenses and revenue before receiving or dispensing money.

Once you’ve chosen your method, you typically can’t change it without IRS approval.

Learn More Business Tax Planning Strategies

If you’re looking for more small business tax tips or want to know how to register a business, reach out to Thomas N. Scheffel & Associates, P.C. We can help you with tax compliance, tax planning, and tax collection representation. Call (303) 759-5937 for a consultation with a tax attorney now.