Paying your taxes as a small business owner might be imperative, but it doesn’t have to be complicated. That said, many new business leaders struggle with the taxation system wherever they may be in the world, and yes, taxes can be complicated if you’re not sure to how to minimize expenses, write stuff off, or just save money on your taxes in general. In reality, there are many ways you can work the system to your advantage while staying on the right side of the law, of course, many of which can help you stay afloat and grow faster in the years to come.
Many factors will determine how you approach paying taxes, get loans, and handle your accounting. After all, there is a difference between LLC taxes and other business entities, as well as various regional regulations regarding tax loans or how you can get tax deductions. With all of that in mind, here are some smart tax tips you should use to your advantage to grow your small business and take your company forward in the years to come.
Understand the regional tax loans
As a small business, you may have trouble getting off the ground and covering your expenses, not to mention that the COVID-19 pandemic may impact your business in such a way that you’re unable to pay your income tax and the like. However, that doesn’t mean that you should simply close up shop, because you can always try to get a tax loan. Now, the rules and regulations regarding taxes and tax loans vary, so you need to know what applies in your state.
For example, getting a tax loan in Hong Kong is typically done between October and April and is a straightforward process with relatively low interest rates, while getting a tax repayment loan in the US can be a more complicated process. For the latter, you would need to loan the money based on the anticipated federal income tax refund, and the loan must be repaid even if the refund turns out to be lower than the amount you have anticipated. Get to know your local regulations regarding tax loans, and you will have a fallback plan should you need a loan to get you out of a tight spot.
Choose the right business entity
There are numerous ways you can incorporate your small business, and choosing the right business entity will also make different tax rules apply to your company.
Sole proprietorship. This business entity means that you yourself own the business and therefore you’re able to take all the profits for yourself, but you also assume all the risk, debts, and expenses.
Limited liability company (LLC). LLC allows you to own the business yourself or share the ownership with other key shareholders. Your LLC taxes are calculated on the type of LLC, typically passed on to the individual tax return of your board members.
S-corporation. This entity allows you to avoid double taxation by passing all profits and losses through your shareholders instead of your company.
Corporation. Corporations are owned by shareholders and provide maximum protection from personal liability. Given the fact that the business itself pays taxes as well as the shareholders, this creates a double taxation system.
It’s important that you research different business entities thoroughly to find the one that fits your goals. You can always change the entity later on as your goals and aspirations start to change. Check if your state allows you to change your business entity without having to dissolve the existing business entity.
Pick the best accounting method
One of the best ways to manage your taxes in a smart way is to keep detailed records and account for your income and expenses. Even if you operate solely online as a digital entrepreneur, keeping track of all expenses and income is vital for a clean tax overview and in order to minimize risks of error and potential legal ramifications.
Typically, you will able to choose between cash and accrual as your accounting method.
The cash method is the most widely used one. With this method, you account for the income you received and the expenses you had within that year.
The accrual method allows you to account for the income for the tax year in which you earned the right to receive it. In other words, you may finish a project in the last month of 2020 but don’t get paid until 2021. In this case, you can still report the income on your 2020 tax return.
Know the available tax breaks and use them
There are many instances in which you might be eligible for a tax break, and as a small business owner, you need to take advantage of every such opportunity. You can get tax breaks and deductions on everything from lunch meetings and business calls, all the way to healthcare premiums and travel costs.
Coupling various tax breaks with how your business is incorporated means that you can deduct tax from various business purchases, but the amount you earn will directly impact your taxable income as well. The IRS website has an extensive list of all tax breaks, so go through it with a fine-tooth comb to seem which tax breaks apply to you.
It’s not easy managing taxes as a small business owner, especially if you’re just starting out. Be sure to use these tips to gain a better grasp of the taxation system in your region, explore your opportunities and fallback options, and prepare yourself for a successful new year.