Common Small Business Tax Questions and Answers
If you’re a small business owner, you probably have a few common questions about filing your taxes. For example, what expenses are deductible? Do I need an EIN or can I just use my SSN? And how does my PPP loan affect my tax filings?
Let’s take a look at some common small business tax questions and answers. By the end of this article, you’ll be more aware of how to reduce your tax liability and get the most out of your taxes.
What business expenses can I deduct?
The IRS and the Franchise Tax Board generally follow federal law when it comes to most business expenses. The attached comparison chart outlines the types of costs you can deduct. These expenses may include the cost of raw materials, office supplies, or manufacturing equipment. In addition, some expenses are considered capital and require depreciation. Capital expenses may also include the cost of purchasing equipment or assets for your business. You may be able to deduct part of these costs each year.
When you’re trying to figure out how much of your expenses you can deduct, you can use the IRS’s definition of ordinary and necessary to make your decision. Many businesses experience losses during the first few years of operation. To limit your losses, consider deferring payments until your business is fully operational. Keeping detailed records of your business expenses will help you maximize your tax deductions. You may also want to consider hiring an accountant or tax adviser to handle the details.
Do I need an EIN to file taxes or is SSN enough?
While an SSN is sufficient for forming a sole proprietorship, it is not enough to file taxes. Many businesses need an EIN to operate under a Tax ID number, a unique tax identifier. The EIN is a free service provided by the IRS. Many companies use it to protect their owners’ SSN from identity theft. An EIN is not linked to an individual’s SSN, but it does provide additional privacy protection for the business. You can apply for an EIN online through the IRS.
Obtaining an EIN is easy. You can apply online if you own a business. All you need is your personal Social Security number, your business address, and its founding date. An EIN is issued instantly. You can use this number to apply for loans, open a bank account, or provide it to vendors. An EIN will remain with you, even after the business ceases operations.
How does my PPP loan impact my tax filings?
You may have recently received a PPP loan for a business that has since lost a significant amount of money. These losses are passed through to the individual owners, and the individual owners may be unable to deduct these losses due to a lack of basis. This situation can be remedied by deferring PPP loan forgiveness until 2021, when it will pass through to individual partners. In addition, forgiven loan funds will not count as taxable income for federal or state tax purposes.
While PPP loans are a great benefit to many, some accounting professionals are surprised by the double benefit. While this was designed to maximize benefits of the COVID-19 pandemic, the double benefit has caused some confusion. In most cases, you should enter expenses like you normally would, as long as they were paid with PPP loan proceeds. Unlike many other types of business loans, you won’t have to claim expenses paid with PPP funds on your tax return.
Does my business qualify for income deductions?
You may be wondering: Does my business qualify for income deductions? You may be surprised to learn that you can deduct your business expenses from your taxable income. You might be wondering, “Does my business qualify for income deductions?” The answer to this question depends on the type of business you own and operate. Generally, the deductions are limited to the amount of taxable income you generate. There are also limitations for certain service trades.
Qualified business income (QBI) is defined as the net amount earned by a qualified trade or business that is connected to a U.S.-based activity. Qualified business income does not include certain types of income, such as dividends, interest, and capital gains. Qualified business income deductions are generally twenty percent of qualified business income after expenses. This deduction can be taken for as long as your business does not exceed $157,500 in taxable income.
Can my employees be reimbursed for health coverage
Many employers are wondering if they can reimburse their employees for health care expenses. In some cases, this is possible if the employer is following IRS rules. While you may be entitled to reimbursement for health care expenses, the IRS may not treat it as such. The reimbursements you provide to employees are considered income and are subject to payroll taxes. However, there are some situations when this type of reimbursement may be tax-deductible.
The government has made it easier for small businesses to reimburse their employees for health care costs through a special program known as a QSEHRA. QSEHRAs are tax-deductible, and are a great way to give your employees health coverage without putting up a big corporate overhead. However, if your employees opt for group health insurance, it may be more costly for your company.