Dealing with taxes is a fact of life for small business owners. Annual expenditures for taxes for most owners are likely their largest outlay each year, exceeding rent or mortgage payments, marketing costs, and vehicle expenses (the only possible larger expenditure is payroll).
Beyond payments to the government for all of the taxes you pay—income taxes on profits; Social Security, Medicare, and other employment taxes like sales taxes (collected from customers), property taxes, and excise taxes—there are other tax-related costs: your time and effort in record keeping and fees to your tax advisors. So, taxes are a big deal.
Small Business Taxes
Did you know that:
Taxes are a Major Concern
Small business owners have much on their minds…revenues, customers, government regulations. But, according to NFIB, taxes continue to be big concern to small businesses, especially with new federal, state, and local tax rules that seem to occur each year.
Taxes May be Lower Now
The Tax Cuts and Jobs Act reduced tax rates for small businesses. For those operating as C corporations, there’s a flat 21% tax rate. For owners of pass-through entities (e.g., partnerships, S corporations), there’s a 20% qualified business income deduction for those who are eligible; this is on top of reduced tax rates for individuals.
Forget Deducting Business Entertainment
After 2017, you can’t deduct the cost of entertaining customers or clients, no matter how relevant to your business. Of course, if you also pay for food and beverages at an entertainment event (e.g., a ballgame), you can still deduct 50% of these costs as long as you pay for them separately and an owner or employee is present at the time.
Tax Incentives for Fringe Benefits Abound
The Tax Cuts and Jobs Act largely left in tact the vast array of deductions and credits for employers that offer various fringe benefits, including deductions or credits for health insurance, retirement plan contributions, and continued wages during family and medical leave. But some breaks ended for employers, such as deducting transportation fringe benefits and employee relocation costs.
The Vast Majority of Small Businesses Used Paid Preparers
Several years ago NFIB found that 88 percent of small businesses used paid preparers for completing their tax return. My guess is that this number is not lower now. It’s likely higher due to the complexity introduced by the Tax Cuts and Jobs Act.
But this statistic is only for tax return preparation. What about your payroll taxes? Your personal estimated taxes? You may use an outside payroll provider to help with payroll taxes or do this in-house. Your personal estimated taxes, which are paid four times a year, usually are up to you. But you may turn to a paid preparer for advice.
The Cost of Tax Preparation is Higher
Given the dramatic changes by the Tax Cuts and Jobs Act, CPAs and other paid preparers have hiked their bills. This is because of the added time to complete new forms and schedules. And if you use a preparer for ongoing tax advice throughout the year, your costs will be higher because you probably need more advice on how to take advantage of new law opportunities.
Taxes Drain Time
Even though most use paid preparers for tax return preparation, many tax chores still fall on small business owners or their employees. These include record-keeping, seeing to tax payments, and meeting or talking with preparers. How much time does it take? It depends who you ask:
- The IRS says recordkeeping needed for a self-employed individual to prepare Schedule C of Form 1040, along with return preparation and time to assemble and submit the return is projected to take an additional 2+ hours. Companies with under $1 million in revenue have two-thirds of business tax compliance costs.
- The SBA found that these same business owners spent 32 hours annually on taxes.
And planning to have the cash on hand to pay tax bills is also up to you. Cash flow planning for various tax obligations can take up some time throughout the year.
Interest and Penalties can Add Up
Even if you use a paid preparer, it’s all too easy to make mistakes, which can cost you additional interest and penalties. With IRS interest rates rising, the cost of underpaying estimated taxes, for example, can really hurt you.
The IRS Knows More than You Think
Some business owners may think they can outsmart the IRS. But with computers (even the outdated ones used by the IRS), it’s difficult to do. For example, some owners may think that by charging their meals on the road to their hotel room, they can avoid the 50% limit on deducting meal expenses. But the IRS computers can tell when this is happening.
There’s a Lot of Tax Information Available to Small Businesses
Taxes are no secret. And the IRS has a great deal of easily accessible information to help small business owners stay tax compliant. Start with the IRS’s Small Business and Self-Employed Center to find links to important topics, such as employer identification numbers and self-employment taxes.
The Future for Taxes is Murky
What has come to be a perennial or bi-annual state of affairs for more than five years, the tax rules for 2018 are not yet settled, even though the tax season for filing 2018 returns is underway. Dozens of tax rules that had expired at the end of 2017 have yet to be extended for 2018. Various technical corrections to the Tax Cuts and Jobs Act are waiting to be enacted. And Congress is considering other tax changes that may impact estimated taxes for 2019.
Taxes aren’t a favorite subject of most small businesses but attending to them has a direct impact on your bottom line.
So, my advice: pay attention to taxes throughout the year (not just at tax time), use a professional to help you (the fees you pay are probably less than what your time is worth), and watch for changes from Congress.