The economic climate is still in shambles because of the COVID-19 pandemic. Financial stability is the most important challenge for 12% of small business owners, followed by loss of business and attracting new customers. It’s no surprise that taxes—a bill that arrives at the end of each fiscal year—are the second-most pressing issue for small businesses in the United States.
Managing your retail store’s taxes does not have to be difficult. This guide explains how taxes affect your small business, how to make tax season less stressful, and the best small business tax tips.
How Taxes Impact Your Small Business
Every small-business owner in the United States is required to pay taxes. While the exact amount varies by state and business structure, taxes are one of the most expensive aspects of running a retail store. The average small business pays a tax rate of 19.8 percent on its earnings.
Taxes are one of the most important bills, besides being one of the most significant business expenses. Small business owners who file their taxes late, incorrectly, or not at all risk fines—or, in extreme cases, criminal prosecution.
The good news is… Taxes for small businesses aren’t as complicated as you might think. A certified public accountant (CPA) will assist you in legally reducing your tax liability so that you are not left with a large bill to pay at the end of the year.
20 Best Small Business Tax Tips
The last thing you want to feel you pay a lot of tax on your small business. Here are the best small business tax tips you could need:
#1. Know your financial jargon
Many taxpayers believe they require a new dictionary to comprehend their tax returns. Accounting has its own set of specialized terminology. Spend some time learning jargon that will help you understand the financial position of your company.
#2. Keep your business and personal finances separate
When starting a small business, the first thing you should do is open a new bank account.
Having personal expenses recorded as business expenses is one of the simplest ways to get into tax trouble. The more organized you are with your business and personal tax records, the less likely it is that the IRS will discover any errors. Having separate bank accounts for business and personal transactions simplifies tax preparation.
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#3. Keep accurate records
Speaking of clean data, having accurate reports will make tax season much easier to navigate. Reconcile income and outgoings with bank statements and receipts or invoices. Alternatively, you can use accounting software to do it for you.
It is critical that they correctly reported it on your financial statements. It doesn’t give you a tremendous advantage, but it helps you understand what your business comparability is so that when you’re evaluating at the end of the year to prepare for taxes, you would see the right information.
#4. Use accounting software
Accounting software is available to help with tax accounting issues. Platforms such as QuickBooks, Xero, and Sage integrate with your eCommerce store, saving you time, reducing errors, and auto-generating reports to help you understand your company’s finances.
#5. Make estimated quarterly tax payments
Small business owners who expect to owe more than $1,000 at the end of the fiscal year are required by the IRS to make quarterly payments. Fill out Form 1040-ES on the following dates to estimate your year-end tax bill and contribute to your year-end accounts- April 15th, June 15th, September 15th, and January 15th.
This is significant because there is no tax withheld on business income that flows through to your personal return.
#6. Set aside cash for payroll taxes
As a small business owner who employs people, you are required by law to report and pay employment taxes. There are several types of taxes to consider for each employee:
- Employers pay half (6.2 percent) of employee earnings for social security.
- Employers pay half (1.49 percent) of an employee’s earnings for Medicare taxes.
- Federal income tax: varies according to salary and personal expenses.
Payroll apps such as Gusto, ClockedIn, and Homebase can help you manage payroll and pay employment taxes. You’ll be able to see when payroll is due, track employees’ working hours, and stay compliant with employment laws all from one dashboard.
#7. Track inventory accurately
Inventory value is the dollar amount you have tied up in unsold inventory. It is another metric you’ll see on your small business’ tax return. If you own several retail stores, it’s a good idea to use an inventory management system that acts as a single source of truth for inventory-related data.
If you don’t use a centralized platform like Shopify to manage your inventory or even the retail sales that go along with it, you’ll have more complications because you’ll have to reconcile that information together.
#8. Know what’s tax-deductible
The lower your profitability, the less tax you’ll have to pay at the end of the year. Claiming business-related expenses as an expense is one sensible way to reduce profit. According to the IRS, businesses can deduct any of the following expenses:
- Ordinary: One that is widely used by other companies in your industry (i.e., other retail businesses).
- One that is required: One that is useful or assists you in growing the business.
#9. Contribute to your retirement account
Small business owners frequently believe that their financial future is entirely in their own hands. Prepare for it—and get a legal tax break—by putting some of your company’s profits into your own 401(k) (k).
The same holds true for your store’s employees. Some retail store employees find it appealing to contribute to their retirement plan. Any contributions you make are tax deductible, so it’s a win-win situation for everyone.
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#10. Make a charitable donation
Small businesses can reduce their tax liability by making charitable contributions, whether they are cash donations to a local non-profit or support a cause in their community. There are some restrictions on how much money you can donate during the tax year:
- Individuals can donate and deduct up to 100% of their taxable income.
- Corporations can donate and deduct up to 25% of their taxable income.
This is more than just a tax-cutting tip; it’s also a way to connect with your target customers.
#11. Deduct the business use of your car
A personal car, whether leased or purchased, used for business purposes is tax-deductible, just like your home. The number of business miles multiplied by the IRS mileage rate, which varies each year, driven helps to calculate the deductible amount. It will be $0.575 in 2020.
Otherwise, deduct your car expenses in proportion to the number of business miles driven. You can deduct two-thirds of eligible car expenses if you drive 20,000 business miles and 10,000 personal miles in a year.
#12. Use bonus depreciation
Bonus depreciation is another method for deducting the cost of expensive store equipment. In contrast to Section 179, the purchase price is deducted from business profits over use. The major benefit of bonus depreciation is that there is no cap. “The depreciation can create a net loss, allowing you to offset future taxable income,” says Riley Adams, licensed CPA and founder of Young and the Invested.
#13. Apply for the qualified business income deduction
Many factors influence your eligibility for this deduction, including the type of service you provide, your income level, wages you pay, and/or assets you own. This tax break is available to brick-and-mortar retailers. A single filer must have less than $170,050 in taxable income in 2022 to qualify for the QBI deduction. This rises to $340,100 for joint filers, such as partners in a retail business.
#14. Plan for tax season
For many store owners, tax season is a stressful time. But it doesn’t have to be that way. By getting your financial ducks in a row before tax season, you’ll be able to meet (or beat) deadlines rather than scrambling to reconcile a bank statement from six months ago.
#15. Hire an accountant
Allow yourself more time to focus on other aspects of your business by outsourcing your tax filing to a CPA—someone who can provide you with personalized tax advice based on your business structure. Because C corporations, sole proprietorships, partnerships, and limited liability companies all have unique tax preparation and filing requirements, it’s difficult to find one-size-fits-all advice online.
#16. Look into small business tax credits
Tax credits are the closest thing to free money you’ll find. Tax credits are one of the most effective ways to reduce your small business tax bill because they offer dollar-for-dollar reductions in your tax liability. Assume your tax bill is $5,000 before credits and you are eligible for a $2,000 tax credit. Your total tax liability is $3,000 (preliminary tax of $5,000).
#17. Save every receipt
Don’t be a slacker in expense tracking. When you cannot record a business expense in your accounting software, you are essentially wasting money. When business expenses are “ordinary and necessary,” they qualify as business tax deductions. Deductions, also known as tax shields, do not provide the same dollar-for-dollar tax savings as credits. Rather, they reduce taxable income.
Your company’s taxable income, which is the difference between revenue and deductions, is used to calculate business taxes. Taking advantage of all available deductions is an important way to reduce your taxable income and, as a result, your tax liability.
#18. Carryover losses
For the first few years, most small businesses operate at a loss. When your company makes a profit, you can use prior business losses to reduce your tax liability through the net operating loss (NOL) deduction.
You started your business in 2019 with $100,000 in revenue and $150,000 in operating expenses, resulting in a $50,000 NOL. Losses are not taxed, but you can take a deduction of up to $50,000 to offset income in years when you make a profit.
#19. Set up a retirement account
You can get a tax break if you contribute to or offer a retirement plan, such as a 401(k) or IRA, whether you’re a sole proprietor or have employees.
Solopreneurs can open a solo 401(k), also known as a one-participant 401(k) (k). Your contributions are tax-deductible up to a certain amount, but you will have to pay income tax on the contributions when you withdraw them in retirement. Business owners can participate in the same traditional 401(k) plans that employees do. Employee retirement plans can help your company save money on employer payroll taxes by reducing the number of employee wages subject to the Federal Unemployment Tax Act (FUTA).
20. Take a home-office deduction
If you work from home, you can qualify for an additional special deduction if you dedicate a portion of your home to your business. The home office deduction can be calculated in two ways. The simplest method is to multiply the square footage of your home office — only 300 square feet — by $5.
Alternatively, you can compute the home office deduction by multiplying eligible home expenses by the percentage of your home that is used for business. If your home office is 500 square feet or less in a 5,000 square-foot home, you may deduct 10% of eligible home expenses.
Frequently Asked Questions
What can be deducted as a business expense?
Car expenses and mileage, office expenses such as rent, utilities, and so on, computers, software, and other office supplies premiums for health insurance, business phone bills, continuing education classes, and so on for business trips, parking is available.
What deductions can I claim if I don't have receipts?
Gambling losses up to the number of your winnings, interest on money borrowed to buy an investment, casualty and theft losses on income-producing property, federal estate tax on income from inherited items such as IRAs and retirement benefits
How can I lower my taxable income in 2021?
Defer bonuses, accelerate deductions and income, donate to charity, maximize your retirement, use your FSA, buy high and sell low, adjust W-4 withholding, and be aware of the ‘other dependent credit.’
How can I get the biggest tax refund possible?
Claim the recovery rebate if you missed a stimulus payment, don’t take the standard deduction if you can itemize, deduct charitable contributions even if you don’t itemize, and don’t take the standard deduction if you can itemize.
Can you deduct your Internet bill from your taxes?
Yes. Since an Internet connection is technically required if you work from home, you can deduct some or even all the cost when filing your taxes. You’ll include the deductible expense in your home office expenses. Internet expenses are only deductible if they are used exclusively for business purposes.
For small business owners who file, prepare, and pay their own taxes, tax season is a stressful time. These are the best small business tax tips you can use. The best time to plan is now, whether you’re checking to see if your business tax deductions are allowed or consulting with a CPA on tax laws in your state.
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