In this webinar, presented in partnership with FOUND/LA and Accion Opportunity Fund, AOF business advisors Luis Ramos and Oren Shani share their best practices to get your small business ready for tax season. Our expert business coaches will guide you through the maze of small business tax preparation. You’ll learn how to stay compliant, discover time-saving strategies for organizing your finances, and receive practical tips to manage your taxes. Whether you’re a seasoned entrepreneur or just starting out, this webinar is perfect for anyone looking to simplify the tax preparation process and ensure tax season success.

This article was written in 2023 for the 2023 tax year. Information may not be updated for the current tax year. For the most relevant tax information, please consult with your tax professional.

Topics Include:

• Expert tips for a smoother tax season
• How to get organized ahead of tax season
• Small business tax preparation tips
• Important tax deadlines
• Where to get help on your taxes
• How to prepare your taxes for business growth
• How your legal business entity impacts your business taxes
• The four main types of business taxes
  • Income tax
  • Employment tax
  • Self-employment tax
  • Excise tax
• The importance of good record keeping
• How your small business taxes change if you have W-2 employees
• How your small business taxes change if you have 1099 contractors
• How your accounting method (cash vs accrual) impacts your taxes
• How to file taxes if you are self employed
• How to deduct business expenses

Small Business Taxes by Business Entity

Tax requirements for small businesses vary by business entity. The chart below summarizes the essential tax information for each entity type.

 

Meet the Experts:

Luis Ramos, Director of Business Advising at AOF. Luis has 10+ years of experience mentoring entrepreneurs, building teams, and creating the processes needed to launch successful businesses. He has advised more than 1,000 businesses from ideas to reaching their goals in both Spanish and English.

Oren Shani is a credit advisor and certified business coach with Accion Opportunity Fund. Oren has 10+ years of experience managing businesses and advising other business owners. He started, managed, and expanded his own business, providing disability accommodations for live events across the country. He now helps entrepreneurs launch and grow their own businesses.

Work directly with an AOF Business Coach! Sign up for free coaching from small business experts. Click here to get started.

 

The information provided in this webinar is for informational purposes only and does not constitute the rendering of legal, accounting, ​tax or other professional services advice by Accion Opportunity Fund or any of their respective subsidiaries or affiliates, and is provided without any warranty whatsoever.​

Presented in proud partnership between Accion Opportunity Fund and FOUND/LA. 

The word audit can strike fear into a person’s heart. But the truth is, IRS audit triggers only affect a VERY small number of tax returns, and usually the auditors are satisfied by providing the documentation to back up your figures. This is why organizing and holding on to your relevant records and statements is so important, as we noted in the first part of this tax series. According to Fundera, the IRS flags just 1-2% of returns for further scrutiny, and half of those belong to people making over $1,000,000.

While most of us have earnings that fall well below a million per year, there are still some red flags that are more likely to trigger an audit, especially for small business owners.

Top 10 IRS Audit Triggers

1. Make a lot of money

As we said, 50% of the returns audited belonged to taxpayers earning more than a million dollars a year. If you make less than a million annually, it cuts your odds of being audited in half (although we’d all probably be willing to chance it, right?!).

2. Run a cash-heavy business

If your business typically deals with a lot of cash, you’re more likely to be audited. The IRS has found a tendency among cash-business owners to “forget” to declare some cash income that might otherwise be reported, and targets these businesses more aggressively. Convenience stores, restaurants, laundromats, car washes, and beauty salons are all more likely to be audited.

3. File a return with math errors

Errors in addition or subtraction will likely get caught, flagging your return for an audit, even if the mistake is in the favor of the IRS. Since tax software does all of your calculations for you, it has the distinct benefit of protecting you from this particular red flag.

4. File a schedule C

Many business owners will have to file a Schedule C to report business income as part of their individual tax returns. This is true of sole proprietorships, which make up the bulk of small businesses. Schedule C will show the profit or loss of your company, but also land your return in the more-likely-to-get-audited pile. Frankly, there’s nothing you can do about this other than making sure you have the proper documentation for all your claims.

5. Take the home office deduction

As described in part three of our tax series, Small Business Tax Deductions, if you regularly work at home in an area exclusively dedicated to your business, you are allowed to deduct some of the cost of that space from your income tax. The IRS may challenge you on this, but if it’s legit and will save you enough money, you may decide it’s worth it.

6. Lose money consistently

Some people try to write off what they spend on hobbies as if they’re claiming expenses as deductions for legitimate businesses. If your company doesn’t show a profit for a majority of the last few years, the IRS may call you in to determine whether you’re actually running a true business venture.

7. Don’t file or file incomplete returns

Even businesses that show a loss instead of a profit have to file tax returns. Drop off the face of the earth with the IRS for a couple of years, and when you show up again, the tax man will likely invite you in to explain things. Filing incomplete returns can have the same effect, even if all you’re missing is a signature.

8. Have a big change in income or expenses

If you showed a profit of $300,000 last year but just $100,000 this year, the IRS may be curious as to what happened. Likewise, you could be audited if you show a huge increase from year to year. That doesn’t mean you shouldn’t make as much as you can, just be prepared to document it, as always, along with the expenses you’re claiming.

9. Mix business and personal expenses

Whether you’re claiming travel, entertainment, or any other kind of expense, you must justify a true business purpose for these deductions. Make sure that your expenses make sense in proportion to your business income. Keep your receipts and indicate the business purpose each expense is for. Don’t take deductions for personal gifts or household items.

10. Use your car for business

This is another area some people take advantage of, so the IRS tends to look carefully. Except for the costs of commuting, small business owners are entitled to claim business-related auto expenses on their taxes. But as with travel and entertainment, keep proper records such as mileage logs and calendar entries that include the business purpose, as taking this deduction may increase your chance of being audited.

What to do if you’re audited

Sometimes audits are totally random, so even though you’ve done everything right, you may still find yourself on the receiving end of some mail from the IRS “inviting” you to explain something on your return.

First off, don’t panic. Second, always respond to IRS requests in a timely manner, and always be cooperative and polite. The agency has an information-packed web page that can help you prepare. Third, you may want to consult with a tax professional if you’re audited, especially if there’s a large sum of money involved.

Many times, resolving the situation will be as easy as providing documentation to back up the figures on your return. Often, these audits will take place entirely by mail, and even if you owe additional money, there may not be any penalties involved. However, if you don’t think you’ll be ready in time to meet the deadline, get in touch with the auditor to let them know. You may be able to dispose of some of the questions and get a postponement for the rest.

The IRS has a three-year statute of limitations for tax returns, although in some cases, that can be extended to six, so hold onto your records for that long so you can prove the claims you made. Most audits happen two to three years after a return is filed.

Keep in mind that state revenue departments can (and do) audit tax returns, as well, and in many cases, have a tougher reputation than the federal government does.

How to Prepare with Financial Education

When it comes to your finances, you want clear guidance and easy-to-implement tools based on your unique needs. Visit Learn with AOF to get started strengthening your financial management and meeting your goals.

Experience a different kind of financial education. Learn with AOF has flexible, on-demand courses developed by small business owners, for small business owners. Learn on your schedule, with no time commitment or limit. Save your progress any time to fit courses into your busy schedule.

NEXT ARTICLE: TOP 5 TAX MISTAKES SMALL BUSINESSES MAKE

Whether you’re a one-person shop working from home, or a team with an office space, store, or warehouse, your small business is going to have to deal with taxes. Taxes can take up a big chunk of your small business’s revenues, so you want to handle them intelligently to minimize your IRS bill. That means you’ll want to take advantage of all the small business tax deductions you can.

Your tax obligations depend on the structure of your business. If you’re incorporated, your tax deductions will come out of your business taxes. But even if you’re not incorporated (a sole proprietorship, LLC, or partnership, for example), you still get to take those deductions. They just come out of your personal taxes instead.

The tax code is complicated and there are certain tricky limitations and exceptions for business-related deductions. Make sure to check in with a tax professional to ensure that you’re following the right rules.

Let’s take a look at some common tax deductions (including some you may not expect) to keep in mind as you manage your books.

Home Office-Based Tax Deductions

One of the many perks of running your remote office or home-based business is the multiple tax deductions available to your home-based business. Common tax deductions for home-based small business include:

• Home office costs (rental and mortgage)
• Office supplies
• Furniture
• Other equipment
• Software and subscriptions
• Mileage
• Travel, meals, entertainment, and gifts
• Insurance premiums
• Retirement contributions
• Social Security contributions
• Cell phone charges

For many remote workers or home-based entrepreneurs, your home office will be your largest deduction. A home office doesn’t need to be a full room to count for a deduction—in fact, it can be just part of a room or a specific location in a part of the house. The one caveat is that the IRS requires your home office to include a space that is used exclusively for your business and has no other purpose. In other words, your couch doesn’t count.

In order to calculate how much to deduct for your home office, you need to find out what percentage of your home constitutes workspace. Measure your home office area and divide that number by the entire square footage of your entire home. The percentage is the fraction of your home-related business expense you can claim for rent/mortgage, insurance, Wi-Fi, and utilities. So if your home is 1,000 square feet and your office space takes up 100 square feet, you can deduct 10% of all of those expenses from your business taxes.

Another home office caveat is the fact that you don’t want to claim a home office if it’s not a dedicated space. Your spare bedroom which you use once a year to do inventory is not going to pass muster for a “home office deduction.” If you have any doubts, check in with a tax professional on how to qualify.

Furniture, Office Supplies, Equipment Tax Deductions

Home-based business owners can deduct not only home office costs, but you can also deduct your home office furniture, office supplies, and home office equipment.

Tax pros say that there are two ways to deduct your home office furniture. The first way is to deduct the entire cost of the purchase the year you purchase it. The second way is to deduct a portion of the cost of the furniture purchase over a number of years, depending on the type of item. This is known as deducting the depreciation.

In addition to your home office and furniture deductions, you can also deduct the cost of business supplies you buy to run your business. Laptops, mobile phones (for business), scanners, and other technology are all tax-deductible. The same principle applies to deducting business expenses; you can either deduct the entire cost up-front at 100% or deduct the depreciation over a specific number of years.

General Small Business Tax Deductions

Whether you’re working out of your home or not, you can deduct many general business expenses, including:

Business Software and Subscriptions

Business software and subscriptions are a small business tax break. Computer software for your small business can be dedicated at a rate of 100% the year you buy it.

Business-related magazines, periodicals, trade journals, and both hard-copy and online subscriptions are 100% deductible as well.

Mileage, Gas, and Tolls

Driving your car for business means that you’re entitled to a tax break on your mileage, gas, tolls, and even auto repairs. In order to total your business mileage, you need to record the date of travel, total mileage, tolls, parking costs, and the purpose of your trip. You can record your mileage and other relevant information by using a notebook or with a dedicated app for the purpose.

There are two choices to deduct business travel mileage, gas, and other costs:

• Deduct Mileage: The first way you can deduct driving costs is by deducting mileage. Total the mileage and add in tolls and parking. For tax purposes, you will multiply your total mileage by 54.5 cents per mile. Measure your personal driving records and deduct that amount, including gas, repairs, and insurance in the total.

Your mileage meter starts the minute you leave your home for business travel (home office) or when you arrive at your business destination and end at your last (non-home office).

• Deduct Car Costs: The second way to deduct the costs of your driving is by deducting car costs. If you own your car, value your loan interest and the car depreciation. If you’re leasing your car, including your lease payments in the calculations.

Note that the regular commute to and from your office is not deductible. These deductions apply only for travel related to the work itself, such as trips to a work site or deliveries.

Business Travel

The entire cost of staying over in a hotel for business travel trip is tax-deductible. If you have to rent a car or use hotel dry cleaning, your costs for being on travel can be deducted too. Your mode of business travel transport, be it plane, train, or auto, is also fully tax-deductible.

Business Meals

The costs of transport and lodging for business travel are 100% tax-deductible, but what about meals? A portion of your business travel meals (50%) do qualify for a tax break. Business meals during the workday at home don’t qualify for a tax deduction, however. The exception to this rule is if you are paying for a meal for the purposes of business or with a client, then you deduct 50% of the cost of the meal.

Business Entertainment and Gifts

Client dinners are deductible at a rate of 50% but what about other forms of client entertainment, such as sports tickets or theater tickets? These are no longer deductible according to 2018 changes in tax laws.

Health Insurance Premiums & Long-Term Care

Health insurance for the self-employed can be pricey. The good news is that cost for paying your health-insurance premiums or long-term care insurance for the self-employed is 100% tax-deductible. Some caveats apply to coverage for spouses and children, depending on your spouses’ employment status and insurance coverage.

IRA Retirement Contributions and Social Security

Saving for retirement can be tough when you’re self-employed. The good news is that any contributions made to your IRA or Keogh account are 100% tax-deductible and 50% of your total Social Security contributions are also deductible on your 1040 tax form.

Cell Phone

Any business-related cell phone or landline calls are tax-deductible. Some small business owners have a dedicated work cell phone for this purpose. If you have a cell phone or landline which is exclusively used for business, then the costs of maintaining that separate phone line are tax-deductible. If you have just one phone for both business and personal use, check with a tax professional about whether any of the cost is deductible.

Office Space

If you’re running an office, store, or warehouse, the expenses associated with keeping that space are deductible. That means rent, utilities, upkeep, and any other costs associated with that space. If you’ve purchased a space, the calculations are a little bit different—you’ll have to calculate the capital expense and depreciation (which is a good time to call an accountant).

Smart Small Business Tax Management = Big Savings

Running a small business can qualify you for dozens of lucrative tax breaks. Since small business tax deductions can be complex, if you have any questions, check with your trusted accountant or legal professionals for clarification about the applicable laws and regulations. And whatever you do, make sure to keep detailed records of all of your expenses so you can back up your deductions in case of an audit.

Learn More

When it comes to your finances, you want clear guidance and easy-to-implement tools based on your unique needs. Visit Learn with AOF to get started strengthening your financial management and meeting your goals.

Experience a different kind of financial education. Learn with AOF has flexible, on-demand courses developed by small business owners, for small business owners. Learn on your schedule, with no time commitment or limit. Save your progress any time to fit courses into your busy schedule.

Learn more about Accion Opportunity Fund (AOF) and how we advise small businesses and give them the support and tools to grow.

You’ve worked hard to build and grow your business, and it’s certainly worth a lot to you. But you may never have considered what it’s worth to other people. Unless you’re trying to sell it, does that matter?

 

Why Should You Value Your Small Business?

The value of your business definitely matters! There are several important reasons why small business owners should attempt to value their businesses. Perhaps the most significant reason is for state and federal tax purposes. Business valuations, assets, and debts can have significant implications on annual tax rates, including the business owners’ personal tax liability.

You’ll need to know the value of your business if you want to bring in an investor; you’ll have to be able to figure out how much of the company they’ll get for their money. And if you plan to sell your business, either now or in the future, then capital gain taxes can have a huge implication on the price of the sale as well as the owners’ personal tax liability.

If you’re taking out a large loan, your lender will want to know the value of your business. You may also need to know the value for insurance purposes.

Business valuation is also important for purposes of estate planning and estate succession. For many small business owners, much of their net worth is tied up in the value of their small businesses. And passing that on can trigger an estate tax, depending on the value of the business – so you need to know the value of your business (and how you expect it to grow) far in advance so that you can create a sensible plan in light of the tax implications. A qualified trust and estates attorney will assist you in making these nuanced decisions.

So yes, there are a lot of good reasons to know the value of your business. How do we go about doing that? The truth is that small business valuation is as much an art as it is a science. There are lots of ways to come to a number, but there’s no definitive “right” answer. Some experts say that your business is worth what you think it’s worth and what you can sell if for, although a potential buyer will likely want a more concrete explanation for how you got to that value.

Let’s take a look at some of the most popular ways to value your small business!

Small Business Valuation Method #1: The Book Value

Most valuation experts agree that the easiest and most straightforward method to determine the value of a small business is to look at the book value. The book value requires the small business owner to look at the balance sheet. Simply put, the book value is the value of all total assets minus all total debt.

In order for you to use the book value method to determine your own business net worth, the first step is to determine the full worth of what your business owns. What does your business currently list as assets? Conduct a detailed and formal inventory of what your business currently owns; this includes all equipment, inventory, computer equipment, furniture, real property, etc. Calculate what these items amount to in total. Then subtract all liabilities and debts to arrive at the book value.

Performing this exercise is helpful not only to arrive at the current business valuation amount, but also for tax and insurance purposes. It’s important to know the full extent of your business assets should you ever need to replace them due to fire, flood, or other disaster. Knowing the current book value of your business can help ensure that you’ve purchased the appropriate amount of insurance coverage to mitigate any potential losses. It also helps you detail whether there are any tax deductions to explore further when working with your accountant.

Many experts recommend that you look at your company balance sheet to get a broad idea of company assets. That means you’ll need to have reliable accounting systems in place, whether you manage it yourself with the help of software, hire a bookkeeper, or use an outside accountant. That’s a good business practice anyway – it never hurts to know exactly what’s going in and out and thorough bookkeeping makes billing clients and paying vendors a lot easier.

Small Business Valuation Method #2: Business Revenue Multiplier

While the book value of a business is the easiest to measure, it’s not necessarily the most accurate. That only gives you what the business would be worth if you stopped operations and sold off all of the assets – liquidation. But your business is a going concern, and its revenue stream is valuable.

So, one way to value your business is to use a multiplier of your business revenue. That means you multiply your annual revenue by a certain number to get to a value. For example, say you’re bringing in $300,000 of revenue every year and use 3 as a multiplier – you’d get a valuation of $900,000.

The multiplier will depend on a number of factors, including the industry you’re in and the size of your business. Business brokers are helpful to help you assess exactly how much your revenue plays into the worth of your business. Since this method may be complicated, it’s helpful to have a business valuation expert assist.

Small Business Valuation Method #3: The Market Value Approach

The market value business valuation approach is exactly as it sounds. This method involves comparing your business to comparable businesses in the same industry which have recently been sold. This method is only effective if there are comparable businesses, in the same industry, of the same size, who have recently sold. Ideally, you’re looking for businesses that are as similar to yours as possible – a similar amount of debt, revenue, and every other aspect of the operation. And you’ll need to find more than one – that way you can get a more accurate sense of the value.

In other words, this method won’t be an option for every business. It can be tough to find businesses that are similar enough. It can also be tough to find information about how much buyers paid for those businesses, especially if the sale was private.

Small Business Valuation Method #4: Present Value of Revenue Stream

This is the most complicated method, but it may also be the most accurate. This method relies on a concept called the “time value of money.” Essentially, a dollar today is worth more than a dollar tomorrow. If you have a dollar today, you can invest it and make interest on it, so tomorrow you’d have more than a dollar!

So, one way to come to the value of your business is to plot out the income from your business for a certain number of years and then calculate the present value using a “discount rate”. The discount rate is similar to an interest rate and is used to indicate the expected growth of your company, among other factors. There are other potential numbers (usually tax-related) that may factor in, but that’s the bulk of it. The math can be tricky, so this method is usually best left to an accountant or business valuation expert. This method also depends on how confident you are in your future revenue and expenses, so it’s generally more effective for a business that has been around for a few years.

 

What Does A Valuation Really Mean?

So we know why we need a valuation and we know some of the methods to get to one, but what does that number actually mean? The closest thing to a concrete value is the book value, but that’s only accurate for liquidation. The others have significant variables involved and that means the answers aren’t going to be perfectly accurate.

At the end of the day, the relevant valuation of your business is going to be a consensus between you and the other parties involved – your lender, purchaser, or investor, for example. They’ll have their own ideas about the future of your business and the value of your assets, so you’ll work together to come to an agreement about a reasonable number. You may even use more than one of the above methods and find a spot somewhere in the middle.

While there’s no “right” answer for the value of your business, using one or more of these methods will give you a ballpark answer, and the rest will come down to negotiations. So make sure your accounting systems are solid and reliable, keep your business plan updated, and don’t undervalue yourself!

 

Taxes. They’re as inevitable as, well… let’s just say you have to pay them. As we learned in the first article of this Tax Series, How to Get Ready for Tax Time, it’s really important to keep track all of your spending. As a small business owner, you’re not only responsible for your individual income tax based on how much money you make, but your business may also have to file a return and pay taxes, depending on the legal structure of the company.

There are federal taxes, state taxes, and in some cases, taxes for the city or municipality where you’re based. The kind of business you’re in will also affect the type of taxes you’re responsible for, as will whether or not you have employees. A certified professional accountant is your best source of information for your particular situation, but here’s an overview to get you started.

Income Tax

Whether they’re profitable or not, all businesses must file a yearly income tax return. Depending on your business, this return will either be a part of your individual return or a separate one just for the company. The business legal structure will also determine which form(s) you use for filing.

Even though a return has to be filed just once a year, income tax is paid as the income is earned throughout the year. Employees will usually have taxes deducted from their pay, and businesses will generally pay taxes quarterly. The government requires some businesses to make estimated tax payments so they’re never far behind in what they owe. Anything additional can be paid when you file your return.

Sole Proprietorship

A sole proprietorship is an unincorporated business owned by one person. For tax purposes, the business and the individual are the same, and the business is taxed through the personal tax return of the owner. The owner also pays a self-employment tax, which covers Social Security and Medicare, on any profit made. We’ll describe this in more detail below.

Partnership

A partnership is a business owned by two or more people who have signed a partnership agreement and have invested in the business. The partnership itself doesn’t pay income tax as a company, but the partners do so on their individual tax returns. The partnership does, however, have to file an information return that shows the total amount of income, expenses and other deductions, the net income of the partnership, and the share of the income attributed to each partner.

Limited Liability Corporation

An LLC can be set up in a number of different ways, and depending on how, will be treated by the Internal Revenue Service (IRS) as either a corporation, partnership, or as part of the LLC owner’s tax return. LLC owners are known as “members” and generally, an LLC with one member will be similar to a sole proprietorship. One with two or more members will be treated like a partnership. An LLC can also file a form with the government and elect to be treated as a corporation.

Corporation

A corporation is made up of shareholders who own stock in the company, and is a separate taxpaying entity apart from its owners. Corporations pay taxes on income when it is earned. When profits are distributed to shareholders, they must pay taxes on those, as well, resulting in a form of double taxation. Corporate income taxes are paid at the corporate income tax rate, which is generally lower than the personal tax rate, although the shareholders will pay on their rate at the individual rate.

S Corporation

An S corporation is created through a special filing when it’s formed, allowing the profits of S corps “pass through” to its owners. This allows S corporations to avoid double taxation on the corporate income, as happens with C corporations described above. S corp income is taxable at the owners’ personal tax rates, although the deadline for S corp tax returns is also typically March 15.

Self-Employment Tax

Everyone who is employed in the U.S. has to pay taxes for Social Security and Medicare. If you work for an employer, they will kick in half of what’s due and deduct the other half directly from your paycheck. If you work for yourself, however (this is the case if you have a sole proprietorship or partnership), you must pay 100% and make these FICA (Federal Insurance Contributions Act) payments on your own so that you will still be provided with retirement, disability, survivor and Medicare benefits.

Estimated Tax

As we noted earlier, income taxes in the U.S. are pay-as-you-go, so if you don’t have taxes automatically withheld from your income by your employer, you are likely responsible for paying estimated tax on your income, interest, dividends, alimony, rent, profits from the sale of assets, and prizes or awards.

Even if you don’t know how much you’ll wind up making at the end of the year, you’re still responsible for paying taxes based on a good faith estimate. (You can be charged a penalty if you underestimate, so be careful!) These taxes are generally due quarterly, and include the self-employment tax described above.

Who has to pay? Usually, anyone who is self-employed, all sole proprietors, partners, and S corporation shareholders who expect to owe $1,000 or more in taxes when they file their annual return. If you are filing as a corporation, the threshold is even lower: $500. And no matter what you estimate for this year, you probably have to pay estimated tax if you owed money for taxes in the prior year.

Employment and Payroll Taxes

If you have employees, you have another set of forms to file and taxes to pay. Employment taxes include the FICA payments for Social Security and Medicare mentioned above, income tax you withhold from your workers’ paychecks, and federal unemployment tax (FUTA). Some businesses will have to deposit these funds with the government monthly, others will do it semi-weekly.

For Social Security and Medicare taxes, remember that you will withhold half of the amount from your employees’ wages and pay the other half yourself. As with all tax calculations, your accountant can help you figure the correct amount, and the IRS has worksheets on its very comprehensive website.

FUTA is reported and paid separately from income, Social Security and Medicare taxes, and is paid by you directly out of your funds. It is not paid by your employees or deducted from their paychecks.

At the end of the year, you’ll also need to prepare and file various forms related to how much was paid to each employee in the form of wages, tips and other compensation. The most common of these is the W-2, although others may apply depending on the form of payment.

Excise Taxes

This is an umbrella term covering certain kinds of environmental taxes, communications and air transportation taxes, fuel taxes, taxes on the sale or use of a variety of different articles, and tax on some sales of heavy trucks, trailers, and tractors.

Not every business has to pay excise taxes, but for those that do, it is due once a quarter. IRS Form 720 lists the items on which excise tax has to be paid.

State Taxes

In addition to the taxes the federal government requires, your state and local governments will have their own demands. As with federal taxes, the legal structure of your business will dictate how and when they’re paid. Additionally, most states will require payments toward state unemployment and workers’ compensation insurance.

California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico also mandate contributions toward temporary disability insurance.

If you do business in more than one state, you may be required to pay taxes in each of them, including both income and sales tax. You can find links to your state tax office on the website of the Small Business Administration.

Sales Tax

Sales tax is imposed on the state and local level, and different places have different rules about which businesses must collect it, how much is levied, and what it is charged for. Generally speaking, if you sell products and some services, you’ll need to collect sales tax and turn it over to your state’s Department of Revenue. Staying on top of your business transactions regularly, as was mentioned in part one of this Tax Series, will make filing your sales taxes much easier.

Sales tax is charged on top of the price of the item you are selling, and is collected on what you sell within your state or to state residents. If you’re an online retailer, you only have to pay sales tax on sales made in states where you have a physical presence, although the federal government is considering a law that would change that. You can stay up to date by checking your state laws at the legal information site Nolo.com.

Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon don’t currently have a sales tax.

Franchise Taxes

Franchise tax is charged by some US states to corporations, LLCs, and some partnerships simply for the privilege of doing business in that state. Typically, it’s based on the company’s net worth, which is usually based on its assets or the number of shares issued. Franchise taxes vary greatly from state to state, although states with higher corporate income taxes usually have lower franchise taxes.

Keep in mind that you don’t necessarily have to have a physical presence in a state to fall under its franchise tax. If you ship there, that may be enough. Each state has its own rules, so if you operate in multiple states, you may want to hire a tax professional to help you sort it out.

Real Estate Taxes

This is another class of local tax your business will have to pay if you own property. It’s assessed in just the same way as the property taxes you pay on your home, based on the value of the land and any buildings you own. It may be assessed by whatever local entity has the jurisdiction where you’re located, whether it’s the village town, county or city.

Corporate Tax Summary

This is a list of the taxes for which your business may be responsible. Most decent tax software available today will be able to walk you through a lot of it, but there’s no substitute for professional, expert advice from someone who knows you and your exact situation.This article provides general information only. Tax requirements are dependent on many factors, including your business structure and business activities. For advice specific to your business, please consult directly with a tax professional.

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