Seven common tax questions when starting a business
When starting a business, taxes and other financial tasks may seem like time-consuming chores that’ll take your focus away from your core business. And you may have so many small business tax questions, you’re too overwhelmed to even know where to start. If so, you’re not alone.
Recently, H&R Block’s Chief Tax Officer, Kathy Pickering, spoke to a group of female entrepreneurs about small business finances and taxes as part of the Brit+Co Selfmade virtual start-up school for aspiring and fledgling female business owners. The questions from participants showed various comfort levels with different tax topics, from start-up to stimulus focused. Kathy’s answers to some of the most common tax questions for small business owners may give you the confidence you need to cross taxes off your to-do list so you can get back to doing what you love.
If you have small business tax questions, Block Advisors small business certified tax pros are always available to help you.
When setting up your company, are legal or other administrative fees deductible?
Starting a business can be costly, but you can deduct up to $5,000 of your start-up costs and up to $5,000 of your organizational costs as business expenses in the first year. Business expenses that qualify could include professional and legal fees, market research, marketing and advertising, employee recruiting and training, equipment and supplies, and more. You’ll want to keep accurate records and receipts so you can show proof of these expenses when it’s time to file your taxes.
How early do you need to form your business entity when starting your small business?
Generally, you should register your business as early as possible to have a definite separation between yourself and your business. Your business structure influences everything from your day-to-day operations to your taxes and personal liability. If you start a business by yourself but don’t form a business entity, you will likely be considered a sole proprietorship, which has both advantages and disadvantages.
What home office expenses can small business owners write off if operating out of their home?
If you use part of your home exclusively and regularly for trade or business purposes, it may qualify for the home office deduction. “Regular use” usually means that the location is your main place of business. “Exclusive use” means that there can be no personal use of the space. If you plan on deducting actual expenses, keep detailed records of all the business expenses you plan on deducting, like receipts for equipment purchases, utility bills and repairs.
What are the tax implications of receiving a PPP loan?
Historically, if you received a business loan and it was forgiven, it was still considered taxable income, but PPP loans don’t follow the same rule. Money received from your forgiven PPP loan will not be included in your gross income at the federal level – therefore won’t be taxed – but states might treat it as taxable income, so you’ll want to check on your state’s treatment of these funds.
In addition, recent legislation gives small business owners the option to deduct business expenses paid with forgiven PPP loans and other COVID-related loans and grants. This creates a second layer of tax benefits: your PPP loan is income tax free, AND you can claim income deductions on your expenses paid.
If you didn’t receive stimulus aid (such as a PPP loan or EIDL loan) are there other stimulus-related tax benefits for small business owners this year?
Yes, including a tax credit for keeping employees on your payroll and changes to paid sick leave benefits. The Employee Retention Credit (ERC) is a refundable tax credit designed to help small business owners with fewer than 500 employees keep employees on your payroll, even if you’ve stopped doing business or your finances took a significant hit from the pandemic. Unlike business loans, you don’t apply for the ERC — it’s a credit on your business’ payroll tax returns.
There were also changes to paid sick leave benefits. The Families First Coronavirus Response Act originally required employers to keep paying employees forced to miss work due to COVID-19, but offered a tax credit to help cover the cost. The December stimulus bill extended the refundable tax credit through the first quarter of 2021.
Another significant tax benefit allows small businesses to file an amended tax return for 2018 and/or 2019 if your business losses were limited for those years. You can also carry back NOLs (net operating losses) from 2018, 2019 and 2020 to the five previous years. That means that if your business made money in the last five years, you can now reduce those prior years’ profits with this year’s loss and get money back for the taxes you previously paid.
What happens if I can’t afford to pay the taxes I owe?
Don’t panic, but don’t ignore the issue. Even if you can’t afford to pay your taxes right now, you should still file your taxes by the deadline. If you file your business tax return and can’t pay (or if your business still owes taxes from a past return), you do have options.
First, make sure the taxes you owe are accurate. It may help to hire a tax professional to look at your return to make sure you are filing correctly, and that you’re not missing out on any of the credits and deductions available to you. If you don’t file your tax return or make a payment arrangement with the IRS, they can eventually force you to pay. The IRS can file a lien that would harm your credit, and they can levy your bank accounts and income sources, such as payments from customers.
Depending on your circumstances, the IRS offers payment options ranging from short extensions for businesses that just need a little more time to pay, to online payment agreements.
What are other benefits of having a tax advisor like Block Advisors?
Most small business owners start their business to pursue a passion, not to crunch numbers. Having a trusted tax advisor in your corner means you’ll have more time to focus on what you love. Working with someone who understands small business can also help you save money at tax time, make tax prep less stressful and provide expert help and guidance if you get audited. Working with a Block Advisors small business certified tax pro also means having someone put a financial lens on your small business – and can help you get every credit and deduction you deserve. This includes a free P&L statement and review and we can also help to better manage cash flow with our quarterly care reminders and payment services, providing guidance on how estimated tax payments and tracking expenses and income could impact your end-of-year tax return and overall profitability.