Workshops are great opportunities to share valuable information that business owners can use immediately. Last week, I was asked to talk about business taxes with a roomful of entrepreneurs in various stages of starting up their businesses. In spite of being at the start-up stage, they asked some pretty sophisticated questions. Quite impressive.
Entrepreneurs start their businesses because they have expertise in their profession, not because they know about business taxes. That’s why my workshop focused on some basics that every business owner should understand to make good choices. Here are three of the tax topics covered in last week’s workshop that might be valuable for you and your business:
Filing Requirements by Business Type
Many small businesses form an LLC, which allows for three options regarding business type. Each business type has different filing requirements:
- Operating as a Sole Proprietor is the simplest form of business for one person. It requires no legal paperwork. Net business profits from the business are reported on a separate schedule on the owner’s IRS Form 1040 and taxed at the owner’s individual rate.
- Two or more people can form a Partnership by executing an operating agreement and requesting a tax ID from the IRS. Partnerships are required to file IRS Form 1065, “U.S. Return of Partnership Income”. Partners receive an IRS Form K-1 to report the allocated portion of income and expenses on her or his individual return.
- An option for one person or up to 100 domestic entities is to form a Subchapter S Corporation. Sub S Corporations are required to file an IRS Form 1120S, “U.S Income Tax Return for a Sub S Corporation”. Shareholders receive a K-1 to report the allocated portion of income and expenses on her or his individual return.
New Tax Law Highlights
The tax rules are complex and numerous. They can also change, like we saw with the Tax Cuts and jobs Act of 2017. There are more, but these are the “big three” changes that business owners need to be aware of:
- Qualifying pass-through businesses get a deduction of 20% of qualifying net business income (IRS link to more info – https://bit.ly/2Mg97wK ). Special rules apply for services that depend on reputation or skill of high-income owner/employees.
- Higher limits for business asset depreciation that generally result in higher deductions (IRS link to more info – https://bit.ly/2skk9FG).
- Losses from pass-through businesses can no longer offset other income, such as wages, investments or another business (IRS link to more info – https://bit.ly/2M18MLR).
Other Tax Considerations
Businesses of any type are obligated to register in their state and local jurisdiction and pay the required taxes and fees. Depending on location, that could involve an annual business license and business property taxes.
Last week’s business start-up workshop was filled with valuable information that attendees could use immediately. These three basic topics are a great start for every business owner to make good choices about business taxes.