6 Frequently Asked Small Business Tax Questions Answered
Whether you’re an LLC, Soleproprietor, or an Individual, as a small business, filing your taxes can get complicated. You need to know what’s deductible and the necessary tax rules to avoid any penalties or fines from the IRS. Here are 6 Common Small Business Tax Questions Answered:
1. What information do I need to file my taxes?
The most crucial thing you can do as a small business owner to be prepared for tax season is to keep accurate financial records. Maintain thorough records of all earnings, costs of products sold, outlays, fixed assets, and loans that pertain to the current tax year. Detail and accuracy are crucial. Tax season can be simplified by working with a certified bookkeeper or accountant who is trained to classify and track this information in accordance with tax requirements.
2. What type of business expenses can I deduct?
A good rule of thumb is whatever keeps the business afloat, you can deduct. Okay, not everything but most things. Think office equipment, supplies, and technology that employees use. Believe it or not, you can even deduct your rent!
Here is a quick list of items and services you can deduct in your small business:
- Software subscriptions
- Business Use Mileage
- Vehicle(s)
- Traveling (lodging/airfare/etc).
- Rent (home office)
- Office supplies and equipment
- Phone and internet
- Certifications, education, and trainings
- Legal fees
- Professional fees
- Meals with clients or employees
- Marketing initiatives
To avoid extravagant spending, keep in mind that certain company expenses cannot be written off. For instance, the deduction for meal and eating expenses related to business is only 50%. Every employee’s daily commute to work is not deductible, but all of their travel costs, including lodging, airfare, and meals, are paid when they go on business trips.
3. Do I need an EIN or social security number to file taxes?
An Employer Identification Number (EIN) is comparable to a company’s Social Security Number (SSN). Each company that applies for an EIN receives a special identification number that is almost entirely utilized by the IRS and banks for tax purposes. You can submit your annual business tax return using your personal SSN and without requesting an EIN if your company is set up as a sole proprietorship and you don’t employ any workers or independent contractors. However, you must submit your taxes using your EIN if you are an LLC, S-corp, or C-corp. You can apply for an EIN online if you don’t already have one.
4. Can I repay my employees for their health insurance?
A frequent query from small business owners is whether employees can be paid for paying for their own health care if they don’t offer health insurance to their staff. In addition to being forbidden, paying for your employees’ medical expenses could result in fines of up to $100 per employee each day. That considered, one alternative is to factor health care into your employees’ compensation to help them cover the price.
5. Are meals fully tax deductible?
Not so fast…that quick burger and fries or iced-coffee drink is not deductible. However, most business-related meals with your employees, clients, stakeholders, etc. can definitely be included in your deductions!
Under the Consolidated Appropriations Act of 2021, eligible business meals purchased from a restaurant from January 1, 2021 through December 31, 2022, are fully tax deductible. The meal must be had with a business contact and an owner or employee of the company must be present (e.g., customer, employee, vendor, consultant). Meals consumed while traveling also count.
6. Should I lease or buy a vehicle for my business?
It’s possible that this is more of a business issue than a tax one. Leasing a car could be less expensive than buying one and might let you drive a more expensive one than if you bought it. Leasing is only realistic, though, if you stick to the annual mileage limit specified in the lease (i.e. 27,000mi), as going over that limit can get expensive.
Regardless, tax deductions can be made if you lease or buy the vehicle for your business. The IRS mileage rate is 54 cents per mile, which is for a leased or bought vehicle. You can deduct lease payments (although there is an offset for expensive light trucks and vans) or depreciation if you buy the vehicle (up to annual dollar limits on this write-off), as well as the same other operating costs for leased or owned vehicles, if you choose to not use this rate and instead deduct your actual expenses (gasoline, repairs).
To help you choose the best course of action for your case, consult a CPA. Give NextGen a call at 918-600-2299. We can’t wait to serve your small business!