As a business owner, you are responsible for paying taxes on your profits. But do you exactly know what a tax liability is, and how can you reduce it?
It is said that globally, countries are losing over $400 billion to private and corporate tax evasion. That’s a very steep number, and many of the fraudsters get in serious trouble.
In this complete guide, we will answer all of your questions about business tax liability and provide tips for reducing your tax bill.
By understanding the basics of business taxation, you can make informed decisions about your company’s finances and stay in compliance with the law. Let’s get started!
What Is Business Tax Liability?
Business tax liability is the amount of taxes that a business owes to the government. This can include federal, state, and local taxes. When a business does not pay its taxes on time, it may be subject to penalties and interest charges.
Furthermore, if a business does not pay its taxes, the IRS may take legal action to collect the money that is owed. This can include levying bank accounts, seizing assets, or filing a lawsuit.
Also, if a business is found to have willfully evaded taxes, the owners may be subject to criminal charges. The first recorded business taxes in history are from ancient Egypt, where businesses were taxed on their profits.
In the United States, businesses are required to pay federal taxes on their profits. They may also be required to pay state and local taxes, depending on where they are located. The tax rate for businesses can vary depending on the type of business and the size of the company.
Depending on the state, businesses may also be required to pay sales tax on the products and services they sell. This is generally a percentage of the sale price.
In addition, businesses may be required to pay payroll taxes. These are taxes that are withheld from employee paychecks and used to fund programs like Social Security and Medicare. Employers are typically responsible for matching the amount withheld from their employees paychecks.
Let’s take a look closer at some of the other business taxes.
The Types of Taxes Affecting Businesses
There are four main types of taxes that businesses must pay: income tax, self-employment tax, payroll tax, and excise tax.
Income Tax
The first type of business tax is income tax. This is a tax on the profits of a business. The amount of income tax that a business owes depends on its taxable income.
Moreover, businesses can deduct certain expenses from their taxable income, which can reduce their tax liability. For example, businesses can deduct the cost of goods sold, employee salaries, and business travel expenses.
Self-Employment Tax
The second type of business tax is self-employment tax. This is a social security and Medicare tax for people who are self-employed. The amount of self-employment tax that a business owes depends on its net earnings from self-employment.
Also, the self-employment tax rate is 15.30%. However, businesses can deduct the cost of half of the self-employment tax from their taxable income.
Payroll Tax
The third type of business tax is payroll tax. This is a federal employment tax that businesses must withhold from their employees wages. The amount of payroll tax that a business owes depends on the total amount of wages paid to its employees.
Excise Tax
The fourth type of business tax is an excise tax. This is a federal tax on certain products and services. The amount of excise tax that a business owes depends on the type of product or service that it provides.
How to Estimate Business Tax Liability?
The first step in reducing your tax liability is to estimate how much you owe. This can be a complex process, and there are many different factors to consider. To get started, you will need to gather all of your financial records, including your income statement, balance sheet, and tax return.
Once you have all of the necessary documents, you can begin to calculate your tax liability. There are many different methods that you can use, but the most common is the income approach. This method simply takes your total income and multiplies it by the tax rate.
For example, if your business has a total income of $100,000 and the tax rate is 30%, your tax liability would be $30,000.
Of course, this is just a simple example, and your tax liability will likely be much more complex. However, understanding the basics of how to calculate your taxes can help you make informed decisions about your business’s finances.
Is Tax Liability the Same As Tax Due?
No, tax liability and tax due are not the same thing. Tax liability is the amount of taxes that a business owes to the government. This can include federal, state, and local taxes.
Tax due is the amount of taxes that a business must pay by a certain date. This date is typically April 15th for federal taxes and June 15th for state taxes. If a business does not pay its taxes by the due date, it may be subject to penalties and interest charges.
Moreover, if a business does not pay its taxes, the IRS may take legal action to collect the money that is owed. This can include levying bank accounts, seizing assets, or filing a lawsuit.
All Business Tax Changes for 2022
The Tax Cuts and Jobs Act made several changes to the business tax code that went into effect in 2018. These changes include a reduction in the corporate tax rate from 35% to 21%, as well as the elimination of the corporate alternative minimum tax.
In addition, the new law created a deduction for pass-through businesses, such as sole proprietorships and S corporations. This deduction allows business owners to deduct up to 20% of their business income on their personal tax returns.
The Tax Cuts and Jobs Act also made changes to the way that foreign earnings are taxed. Under the new law, foreign earnings are generally subject to a lower tax rate than they were before.
Finally, the new law created a new tax credit for businesses that provide paid family and medical leave. This credit is worth up to 12.% of the wages paid to employees on leave.
While the changes made by the Tax Cuts and Jobs Act will generally result in lower taxes for businesses, it is important to consult with a tax professional to determine how the new law will impact your specific situation.
The Infrastructure Investment and Jobs Act
The Infrastructure Investment and Jobs Act is a new law that provides tax incentives for businesses that invest in infrastructure projects. This includes investments in roads, bridges, railways, airports, and water systems.
Under the new law, businesses can claim a tax credit equal to 20% of the cost of their infrastructure investments. This credit can be used to offset both federal and state taxes.
In addition, the Infrastructure Investment and Jobs Act provides tax-exempt financing for infrastructure projects. This can help businesses save money on interest payments when they borrow money to finance their projects.
The Coronavirus Aid, Relief, and Economic Security Act
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is a law that provides relief to businesses and individuals affected by the coronavirus pandemic.
Among other things, the CARES Act provides tax relief for businesses that have been impacted by the pandemic. This includes a payroll tax holiday for certain businesses, as well as an extension of the due date for paying federal taxes.
The CARES Act also provides loans and grants to small businesses that have been impacted by the pandemic. These funds can be used to cover expenses such as payroll, rent, and utilities.
Finally, the CARES Act establishes a new tax credit for businesses that provide paid leave to employees affected by the coronavirus. This credit is worth up to 100% of the wages paid to employees on leave.
Tax Cuts and Jobs Act Rules
In December of 2020, Congress passed a law that suspends several provisions of the Tax Cuts and Jobs Act. This suspension applies to the 2021 and 2022 tax years.
Among the provisions that are suspended is the corporate alternative minimum tax. In addition, the deduction for pass-through businesses is also suspended for 2021 and 2022.
The changes made by the Tax Cuts and Jobs Act will generally result in lower taxes for businesses, but it is important to consult with a tax professional to determine how the new law will impact your specific situation.
Interest Expense Limitations
In order to deduct interest expenses, businesses must first meet a number of requirements. The most important requirement is the debt-to-equity ratio. This ratio must be less than one-to-one in order for a business to deduct its interest expense.
In addition, businesses can only deduct interest expense if it is paid on business-related debt. This includes debt that is used to finance the purchase of business equipment or property, as well as debt that is used to finance the operation of the business.
Businesses can also deduct interest expense if it is paid on loans that are used for working capital. Working capital is defined as money that is used to pay for day-to-day expenses, such as inventory and payroll.
The deduction for interest expense is limited to $500,000 for corporations and $250,000 for pass-through businesses. This limitation applies to both federal and state taxes.
To claim the deduction, businesses must file Form 8825 with their federal tax return.
Charitable Contribution Rule
The charitable contribution rule allows businesses to deduct the cost of donations made to qualifying organizations. To qualify, organizations must be approved by the IRS.
The deduction is limited to 30% of a business’s income. This limitation applies to both federal and state taxes.
To claim the deduction, businesses must file Form 8829 with their federal tax return.
Businesses can deduct a variety of expenses, but some deductions are more common than others. The most common deductions are for business-related travel, entertainment, and meals.
Deductions for business-related travel include the cost of airfare, hotels, and rental cars. Deductions for entertainment include the cost of tickets to sporting events and concerts. Deductions for meals include the cost of food and drink at business-related events.
To claim these deductions, businesses must keep receipts and documentation of their expenses. These records must be kept for three years from the date of the expense.
Families First Coronavirus Response Act
The Families First Coronavirus Response Act provides paid leave to employees who have been affected by the pandemic. This leave can be used for a variety of reasons, including caring for a sick family member or taking care of a child whose school is closed.
The act provides two weeks of paid leave at 100% of an employee’s salary. After that, employees are eligible for two more weeks of paid leave at 75% of their salary.
To claim the credit, businesses must file Form 8966 with their federal tax return.
How Can You Reduce Your Business Tax Liability?
There are several ways that you can reduce your business tax liability. Some common strategies include:
Claiming deductions and credits: Deductions and credits can lower the amount of taxes that you owe. Be sure to keep track of all eligible expenses so that you can claim them when filing your return.
Making estimated tax payments: If you expect to owe more than $500 in taxes, you may be required to make estimated tax payments throughout the year. This can help you avoid penalties and interest charges.
Filing a timely return: Be sure to file your tax return by the due date to avoid late fees and penalties.
Utilizing tax-advantaged accounts: Tax-advantaged accounts, such as 401(k)s and IRAs, can help you save on taxes. This is because the money that you contribute to these accounts is not subject to income tax.
Hiring a tax professional: A tax professional can help you identify deductions and credits that you may be eligible for. They can also help you file your return and make estimated tax payments.
Investing in energy-efficient equipment: Energy-efficient equipment can help you save on your energy bills. You may also be eligible for tax credits when you purchase this type of equipment.
Hiring employees: Employees can help you with the day-to-day operations of your business. They can also provide valuable tax breaks, such as the payroll tax credit.
Which Business Structure Is Best for Reducing Tax Liability?
The type of business structure that you choose can also affect your tax liability. For example, sole proprietorships and partnerships are subject to self-employment taxes. These taxes can be significant, so it is important to consider this when choosing a business structure.
C corporations are subject to corporate income tax. This can be higher than the personal income tax, but it is important to note that dividends from a C corporation are not subject to self-employment tax.
S corporations are similar to C corporations, but they are not subject to corporate income tax. Instead, the income of an S corporation is taxed at the personal level. This can provide significant tax savings for business owners.
LLCs are taxed as partnerships, but they offer liability protection for the owners. This can be beneficial if you are concerned about being held personally responsible for the debts of the business.
How Often Do I Have to Pay Taxes?
The frequency of your tax payments will depend on the type of taxes that you owe. For example, federal income taxes are typically due on April 15th. However, state and local taxes may have different due dates.
It is important to note that you may be required to make estimated tax payments throughout the year if you expect to owe more than $500 in taxes. Estimated tax payments are typically due on April 15th, June 15th, September 15th, and January 15th.
Paying taxes as a business owner requires a lot of planning and prep work. But by understanding the basics of business taxation, you can make informed decisions about your company’s finances and stay in compliance with the law.
What Happens If I Don’t Pay My Business Taxes?
If you don’t pay your business taxes, you may be subject to penalties and interest charges. Furthermore, the IRS may take legal action to collect the money that is owed.
This can include levying bank accounts, seizing assets, or filing a lawsuit. If a business is found to have willfully evaded taxes, the owners may be subject to criminal charges.
Therefore, it is important to stay current on your tax payments and file your return by the due date. You can also reduce your tax liability by claiming deductions and credits, making estimated tax payments, and utilizing tax-advantaged accounts.
Finally, investing in energy-efficient equipment and hiring employees can also help you save on taxes.
By understanding the basics of business taxation, you can make informed decisions about your company’s finances and stay in compliance with the law.
Common Tax Mistakes Made by Businesses
Businesses can make a number of mistakes when it comes to taxes. Here are some of the most common mistakes:
Failing to file a return: If you don’t file a return, you may be subject to penalties and interest charges.
Filing a late return: If you file your return after the due date, you may be subject to penalties and interest charges.
Failing to pay taxes: If you don’t pay your taxes, you may be subject to penalties and interest charges. The IRS may also take legal action to collect the money that is owed.
Claiming improper deductions: If you claim deductions that you are not entitled to, you may have to pay back the taxes that you saved plus interest and penalties.
Failing to keep good records: Good record-keeping is essential for businesses. If you don’t have adequate records, you may be at a disadvantage if your return is selected for an audit.
Things Businesses Should Remember When Dealing With Taxes
By understanding the basics of business taxation, you can make informed decisions about your company’s finances and stay in compliance with the law.
When it comes to taxes, there are a few things that businesses should keep in mind:
Taxes are an important part of doing business.
You can reduce your tax liability by claiming deductions and credits, making estimated tax payments, and utilizing tax-advantaged accounts.
Businesses are required to file a return even if they do not owe any taxes.
The frequency of tax payments depends on the type of taxes that are owed.
Estimated tax payments may be required if you expect to owe more than $500 in taxes.
Penalties and interest charges may be assessed if you don’t pay your taxes on time.
The IRS may take legal action to collect unpaid taxes, including levying bank accounts, seizing assets, or filing a lawsuit.
Willful evasion of taxes can result in criminal charges for the business owners.
Business Taxes Done Right
Paying taxes as a business owner can be complicated, but it is important to stay current on your tax payments and file your return by the due date.
You can also reduce your tax liability by claiming deductions and credits, making estimated tax payments, and utilizing tax-advantaged accounts.
Finally, investing in energy-efficient equipment and hiring employees can also help you save on taxes.
By understanding the basics of business taxation, you can make informed decisions about your company’s finances and stay in compliance with the law.
If you have any questions about business taxes or need help filing your return, consider contacting a professional accountant or tax attorney. Fortunately, we provide tax planning and resolution services, so get in touch with us now.
