Our Guide to Streamlining Business Taxes
What are the different types of business taxes?
There are five general types of business taxes:
- income tax
- estimated taxes
- self-employment tax
- employment taxes, and
- excise tax.
All businesses other than partnership structures have to file an annual income tax return. Different business structures file various returns, so it’s important to know how your business is structured.
Most companies pay income tax with regular, estimated payments throughout the year.
Self-employment tax is for people who work for themselves, contributing to social security and Medicare. Employment tax is for businesses with employees and includes social security and Medicare tax, federal income tax withholding, and federal unemployment tax.
An excise tax applies to some companies that manufacture or sell certain products, operate particular kinds of businesses, use specific equipment, facilities, and products or receive payment for specified services. Excise taxes may include environmental, communications and air transportation, fuel, or retail sale of heavy trucks, trailers, and tractors.
How do I know what business structure I am in?
You select your business structure before registering your business with the state.
A sole proprietorship is common, easy to form, and gives business owners complete control. This is the default business structure for anyone who does business activities but does not register as any other type of business. In a sole proprietorship, your business assets and liabilities are not separate from personal assets and liabilities.
A partnership is a business structure that is a relationship between two or more people doing trade or business. Each contributes and shares in profits and losses.
A partnership files an annual information return but does not pay income tax, instead passing profits or losses through to its partners. Each individual partner reports their share of income or loss on their tax return. Partners are not employees.
Limited liability companies (LLC) are owned by ‘members’ who generally can be individuals, corporations, other LLCs and foreign entities. The rules on membership differ from state to state. Depending on how the LLC is structured, it is considered a corporation, partnership, or part of the owner’s tax return for filing.
In a corporation, prospective shareholders exchange money and/or for the corporation’s capital stock. Profit is taxed when earned, then taxed to shareholders when distributed as dividends.
S corporations are somewhat different. S corporations elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
How to find out when and how to file my taxes?
When you set up your business, pay attention to what you are doing and carefully consider your options. You can change some things later, but it’s always more work to do after the fact.
For example, the tax year you choose can impact when you file your taxes — the calendar year is good for businesses without special accounting needs, but you may want to use a fiscal tax year or need to use a short tax year.
The IRS has a Tax Information for Businesses website with details, tools, and resources for businesses and self-employed people. It is a good place to get started. Working with a CFO, financial team, or both, can also be very helpful in working on filing taxes proactively.
How do I learn which taxes apply to my business?
You will need to know if your business has to pay local and state taxes and federal taxes. Check with each level of government, and again, be aware of your business structure. The state and local tax authorities are there to help you understand what taxes apply to your business, along with any financial advice you are getting from a CFO and/or financial team.
Qualified, experienced professionals will outline what taxes your business will owe and show you how and when to pay. If you want tax time to be quick and easy, it may be worth investing in this help.
What business expenses are tax-deductible?
The IRS Publication 535 shares some common deductible business expenses. It’s always a good idea to check with your financial team and/or any relevant authorities before moving forward.
The IRS rule of thumb is that for a business expense to be deductible, it must be both ordinary and necessary. An ordinary expense is common and accepted as an expense within your industry. A necessary expense is helpful and appropriate for your trade or business. An expense does not have to be vital to be considered necessary.
For example, if your business needs telephone and internet services, those can be deductible business expenses. Advertising and promotion costs, such as launching a website or buying a print media ad, are also deductible expenses.
Generally, you can deduct the total amount of a business expense if it meets the criteria and is not a capital expense.
How to keep track of receipts/invoices for my business
To access any tax deductions and otherwise make sure that you are filing appropriately and optimally, it is important to keep track of receipts and invoices as you go. If you try to piece it all together at the end of the year, you will likely run into missing information and other challenges and miss out on potential tax savings.
Accurate records, with strong bookkeeping practices, are the key to adding up income and expenses, including deductible expenses.
You can either manage your bookkeeping or get help from an outside firm. Working with a CFO or tax professional can be very beneficial, particularly for small businesses. That way, you can spend less time worrying about finances while knowing that you have an organized, functioning system to minimize tax liability.
How do I get an extension on business taxes?
You may request up to an additional six months to file your individual income tax return. This does not give an extension of the time to pay, and the request for an extension must be filed by the regular due date of the return to avoid a late filing penalty. You can file this form electronically or in paper form as Form 4868.
Most business tax returns can be extended by filing Form 7004: Application for Automatic Extension of Time to File by the return’s original due date. This provides a six-month extension.
What to do if I’m delinquent on my business taxes?
If you do not file a required tax return by the due date, the IRS will charge a 5 percent per month penalty. If there is a balance owing, a .5 percent per month failure to pay penalty will apply. You will also accrue interest on any unpaid balance from when the return was due until it is paid in full. Finally, the IRS can file a return on your behalf using available information.
You should move quickly to catch up on back taxes. Get all the information you need to file a past-due return, including information from your records. You can ask the IRS for more time, but be sure to do so immediately.
You may have options, including a payment arrangement if you cannot pay the whole amount, a penalty relief request, or a penalty abatement for an S corporation.
If you are overwhelmed by catching up on delinquent taxes, this is an ideal time to call in an expert.
What are the official IRS streamlined procedures?
The IRS Streamlined Filing Compliance Procedures brings taxpayers into compliance if their failure to report foreign financial assets and pay the tax due on those assets did not result from willful conduct on their part. The procedures allow taxpayers to file amended or delinquent returns with terms for resolving resulting issues.
These streamlined procedures are only for individual taxpayers and are not open to anyone with whom the IRS has initiated a civil examination of taxpayer returns. Taxpayers who have previously filed delinquent or amended returns must pay previous penalty assessments.
How do I stay current on tax law changes affecting my business?
Tax laws change practically every year. There are a few ways to stay on top of these changes. The first is to read IRS releases and information that summarize what individuals and businesses need to know. The same holds for state and local authorities, which also change tax laws.
Working with a financial team helps you stay up-to-date without worrying about it yourself. Your CFO or other financial advisers will be responsible for understanding tax changes and how they could impact your company.
Should I use cloud-based accounting software to manage my taxes?
Cloud-based tax accounting software can be helpful for companies wanting to stay organized and up-to-date. Cloud-based software allows employees and advisers to manage all tax-related data from multiple locations. Information is updated in real-time for all users in all areas.
If you use cloud-based accounting software to manage your taxes, be sure that it will be updated with tax changes each year. You will also want to choose software with solid security features and train employees on best practices.
How do I know when to consult a professional for tax advice?
The more complex your tax filing situation, the more likely you will benefit from professional tax advice. For businesses, complexity can grow quickly, so if at any point you feel overwhelmed by your finances or tax burden, it’s an excellent plan to check in with a pro.
Preparing and filing taxes can be a significant stressor, particularly for small businesses and self-employed people. Even if you do not feel like you need professional financial advice year-round, having an expert for tax season ensures accurate, timely filing.
If your business taxes are audited, that’s another flag to hire a professional. While it is better to be proactive in this regard, if you are at the point of an audit, a professional can reduce the expense, time, and stress involved.
What’s the difference between a tax specialist and an accountant?
An accountant covers various aspects of your business finances, while a tax specialist has specific skills in corporate taxation. If you are specifically worried about or looking for help with taxes, a specialist will get you through those concerns. An accountant is there for overall, broad financial expertise for your business.
You may choose to work with an accountant, a tax specialist, or both at different times. Both serve an important purpose, but if you need tax help a general accountant may not have what you need.
What to look for in a tax accountant
When hiring a tax accountant, be sure they are the right fit for your situation. For instance, if you are hiring someone because you have been audited and need help, you will want to work with a specialist who knows how to get through audits. Ask industry peers for referrals or potential hires to tell you about their past work.
You will want to work with an organized tax accountant who is able to meet your needs as they arise. Their availability should match the frequency with which you will need them.
Try to connect with a tax accountant long before tax season. It’s the busiest time of the year for any accountant, let alone one who specializes in taxes!
Be prepared to converse with any potential tax accountant to ensure they have the knowledge, skills, and availability your business needs. Ask about licenses and designations, specialty areas, fees, the timeline for dealing with your tax situation, and their privacy policy.
You can check with state accountancy boards to see if an accountant’s license is in good standing and if they have ever faced disciplinary action. For enrolled agents, who are credentialed with the IRS, you can check with the IRS Office of Professional Responsibility.
Choosing the right tax accountant is essential. Ultimately, your business is on the hook for your tax return, not the professional you have hired.
*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*
- Last Modified
- November 22, 2023
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