Let’s be honest. Small business taxes are straight-up hard. This is true whether you’re a new solopreneur or a seasoned entrepreneur. To make things easier, we consulted a CPA for small business tax tips.
Small Business Tax Challenges
Certainly, complex tax laws and ever-changing regulations are a challenge for all small business owners. After all, you’re focused on running your business, not on being an IRS whisperer! Thankfully, there are experts out there who are just that and they’re here to help.
To that end, we spoke with Shiloh Johnson, longtime CPA and founder of ComplYant. Complyant is a digital tax assistant that offers small businesses and entrepreneurs a simple way to manage tax rules and regulations. Below, Shiloh shares some small business tax tips to help entrepreneurs with paying taxes.
“As an entrepreneur, it can be easy to assume that the government is out to make life harder for small business owners with these tenuous tax rules.” However, she assures us that isn’t actually the case. “There are lots of exemptions and loopholes that can be taken advantage of if you just know where to look.”
Small Business Tax Tips
Following that, here are a few specific small business tax tips from Shiloh. Helpfully, these tips will prepare you for tax time and may even lower your tax bill.
1. Remember: Sales Tax Is Not Income
First, be diligent in your accounting to avoid overestimating your taxable income.
“Be careful not to report sales tax received from customers as income,” Shiloh warns. Instead, make a payable account and call it Sales Tax Payable. Put the portion of sales tax received from customers in that account.”
“Payable accounts are liability accounts, and funds are used to make your sales tax payments to the tax authorities. By doing this correctly you will avoid inflating your income and inaccurately reporting the income of your business.”
Similarly, you’ll want to keep track of your business expenses. For more help tracking your income and finances check out our collection of guides on Organizing Your Finances.
2. Know Your Required Business License(s)
Secondly, make sure you understand your local licensing requirements.
“Many businesses do not know they need a business license to operate in their state, county, or city. Certain business types may require professional licenses.” In this case, you are likely to need a state and local license to operate.
Further, keep these up to date. “You will need to obtain and renew these licenses on time and regularly. Check with your city or local municipality for license requirements.”
Head over to our Set Up Your Business milestone to learn more about obtaining your sales tax license and determining your permit needs.
3. Be Careful With Profit Loss
Thirdly, avoid being hit by hobby loss rules by keeping watch on your business profits.
“Continual loss may cause your business to be seen as a hobby,” Shiloh says. “If you have a business that routinely takes losses you might be in for an audit.”
The IRS’s hobby loss rules require a business to show a profit on a regular basis. The IRS has a list they use to determine if your business qualifies as a hobby or an actual business. These rules are located in sec 183 under “hobby loss rules.”
4. Exempt Your Property Tax If Possible
Fourthly, check to see if you qualify for property tax exemptions as a small business.
“Many small businesses qualify for property tax exemption under their state and local law ordinances. All you have to do is ask,” Shiloh says. However, there are typically requirements for approval. “Qualifiers for the exemption typically include, but are not limited to, the business’s location and annual income.”
5. Watch S-Corp Election Timing
Finally, get savvy on s-corp elections—ideally, with the support of a knowledgable CPA.
The S-Corp Election is not a legal entity. It’s an election you can make to be classified as an S-corp for tax purposes. That way, any profit over and above your reasonable compensation will not be subject to self-employment tax, just income tax. If you make $100K but your reasonable compensation is $40K, the remaining $60K is only subject to income tax, not self-employment tax. That’s a big break.
However, it’s important to note the timing of the election window.
“The S-corporation election window for an existing business is within the first two months and 15 days after the start of the tax year you are selecting the election. This election allows an LLC to be taxed as a corporation.”
According to Shiloh, some benefits of this election include:
- Protected assets
- Tax favorable categorization of income
- Straightforward transfer of ownership
- No double taxation
With that said, make sure you’re working with a CPA who understands S-Corps elections. There might be circumstances where taking the election won’t be beneficial for you. Further, it can come with additional administrative burdens as well.
Finally, Shiloh leaves us with one last all encompassing piece of advice:
“Always remember, when in doubt get organized.”
More Small Business Tax Resources
As an additional resource, check out this webinar we had with Shiloh for an in-depth conversation about tax prep for small businesses:
For more information, check out these Hello Alice guides and milestones that can also help you come tax season:
- Understand Your Tax Obligations
- Know Your Business Tax Deductions
- Claim the R&D Tax Credit
- File Your Federal Business Taxes
- Set Up Your Business
About Shiloh Johnson
Shiloh Johnson, CPA, has written course content for the National Association of Tax Professionals. She is a member of the Institute for Professionals in Taxation, American Institute of CPAs, and the National Association of Black Accountants. She fights for the underserved. Significantly, she believes that the color of your skin should not impact your likelihood of success. In following that, everyone deserves complete and accurate fiscal guidance and financial success.
Notably, Shiloh Johnson was recently awarded a startup grant by the Annenberg Foundation and Pledge LA. She has also received capital from Mucker Lab and Slauson & Co. Last but not least, Shiloh is also participating in Grid110 and Techstars LA accelerators.
About ComplYant
ComplYant’s mission is to ensure that organizations of all colors, shapes, and sizes have access to accurate fiscal guidance. Markedly, they are rooted in the firm belief that complex tax laws and nuanced regulations often create barriers for small or underrepresented business owners.
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