Tax breaks reduce taxes owed to a government by an entity such as a small business. Different types of tax breaks for small businesses in the U.S. come in the form of tax deductions and tax credits and include a wide range of expenses and expenditures incurred by a business. The reason why the various types of tax breaks for small businesses are so useful is because they 1) reduce or eliminate taxation of business operating expenses and 2) can help preserve business retained revenue. The remainder of this article will outline business tax breaks and the process by which they are sometimes claimed.
Deductible business expenses
Amount the types of tax breaks available to sole proprietorships, LLC’s and partnerships are business expenses. These expenses take the form of deductions to taxable income which means a smaller amount of income will be taxed at a given tax rate after the deduction is granted. An example of a deduction available to sole proprietorships, S-corporations and partnerships are expenses for 1) licenses and 2) interest.
Tax deductible business expenses are costs incurred in the operating of the business, and are subject to specific tax regulations that should be complied with before claiming the deduction. Even though some business operating costs are deductible doesn’t necessarily mean they are worthwhile expenses because the tax benefit is only a fraction of the actual cost. For example, if a business purchases a new antique diamond studded office fish tank for $10,000 thinking the cost can be written of through taxes, they may be in for a surprise. That office expense may not only be non-deductible; and if it is deductible may only reduce cost by the 15%-35% tax rate, or $1,500-$3,000 which that business is taxed.
Business tax credits
Being aware of the available types of tax credits is a good step in both tax planning and strategy in addition to tax filing. Not claiming tax credits can be costly to a business making the time and research used in becoming cognizant of business tax credits potentially worthwhile. As with business expenses, identifying which IRS forms and publications apply to a specific business is helpful in identifying the most clear business tax credits qualified for. A few places to start looking for business tax credits are listed below:
(1) IRS Business Tax Credit information page
(2) U.S. Code on Tax Credits
(3) Tax strategy review
(4) Offshore business tax strategy
(5) State Departments of Revenue
Types of tax credits for small businesses may also be added or eliminated with changes to legislation in each new tax year. Generally, these changes to the tax law are updated by the IRS through edits on the relevant tax forms. However, it can be helpful to be familiar and up to date with available tax credits in case they are not clearly marked on the standard business tax return forms. Additionally, even though a space may be present on the Form, the information about the tax credit may be in a different IRS publication. For example, on the 2009 Form 1120-S is a line for other credits on line 13g. This line refers the tax filer to the instructions for form 1120-S. Thus, taking the time to read and be aware of multiple source on business tax credits may be beneficial to business retained income.
How to claim business tax breaks
Business tax breaks vary between the business types; for example, sole proprietorships are not necessarily subject to the same tax benefits as a partnership or limited liability corporation (LLC). So accordingly, an important step is determining the type of business for which the tax breaks are for. Each business type has different tax forms issued by the U.S. Internal Revenue Service (IRS). For example, an S-Corporation or small business is required to complete a Form 1120-S.
Step 1: Identify business type
Step 2: Locate correct tax forms
Step 3: Assess and research tax breaks
Step 4: Apply tax break(s) to business tax return
The business tax forms that may be required include (1) Form 1040 Schedule C for sole proprietorships, (2) Form 1120-S for S-Corporations, (3) Form 1065 for business partnerships, and (4) Either a Form 1065, Form 1120, or Form 1040 Schedule C, depending on the type of LLC. For example, a limited liability corporation may have only one person who owns the business and who fulfills all the executive roles which may require the 1040 Schedule C be filed rather than a Form1120-S. The following link provides a more complete list and illustration of LLC tax filing classification.
Deductible business expenses
Amount the types of tax breaks available to sole proprietorships, LLC’s and partnerships are business expenses. These expenses take the form of deductions to taxable income which means a smaller amount of income will be taxed at a given tax rate after the deduction is granted. An example of a deduction available to sole proprietorships, S-corporations and partnerships are expenses for 1) licenses and 2) interest.
Tax deductible business expenses are costs incurred in the operating of the business, and are subject to specific tax regulations that should be complied with before claiming the deduction. Even though some business operating costs are deductible doesn’t necessarily mean they are worthwhile expenses because the tax benefit is only a fraction of the actual cost. For example, if a business purchases a new antique diamond studded office fish tank for $10,000 thinking the cost can be written of through taxes, they may be in for a surprise. That office expense may not only be non-deductible; and if it is deductible may only reduce cost by the 15%-35% tax rate, or $1,500-$3,000 which that business is taxed.
Business tax credits
Being aware of the available types of tax credits is a good step in both tax planning and strategy in addition to tax filing. Not claiming tax credits can be costly to a business making the time and research used in becoming cognizant of business tax credits potentially worthwhile. As with business expenses, identifying which IRS forms and publications apply to a specific business is helpful in identifying the most clear business tax credits qualified for. A few places to start looking for business tax credits are listed below:
(1) IRS Business Tax Credit information page
(2) U.S. Code on Tax Credits
(3) Tax strategy review
(4) Offshore business tax strategy
(5) State Departments of Revenue
Types of tax credits for small businesses may also be added or eliminated with changes to legislation in each new tax year. Generally, these changes to the tax law are updated by the IRS through edits on the relevant tax forms. However, it can be helpful to be familiar and up to date with available tax credits in case they are not clearly marked on the standard business tax return forms. Additionally, even though a space may be present on the Form, the information about the tax credit may be in a different IRS publication. For example, on the 2009 Form 1120-S is a line for other credits on line 13g. This line refers the tax filer to the instructions for form 1120-S. Thus, taking the time to read and be aware of multiple source on business tax credits may be beneficial to business retained income.
How to claim business tax breaks
Business tax breaks vary between the business types; for example, sole proprietorships are not necessarily subject to the same tax benefits as a partnership or limited liability corporation (LLC). So accordingly, an important step is determining the type of business for which the tax breaks are for. Each business type has different tax forms issued by the U.S. Internal Revenue Service (IRS). For example, an S-Corporation or small business is required to complete a Form 1120-S.
Step 1: Identify business type
Step 2: Locate correct tax forms
Step 3: Assess and research tax breaks
Step 4: Apply tax break(s) to business tax return
The business tax forms that may be required include (1) Form 1040 Schedule C for sole proprietorships, (2) Form 1120-S for S-Corporations, (3) Form 1065 for business partnerships, and (4) Either a Form 1065, Form 1120, or Form 1040 Schedule C, depending on the type of LLC. For example, a limited liability corporation may have only one person who owns the business and who fulfills all the executive roles which may require the 1040 Schedule C be filed rather than a Form1120-S. The following link provides a more complete list and illustration of LLC tax filing classification.
Source: http://www.irs.gov (U.S. Internal Revenue Service)
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