All types of small businesses, sole proprietorships, LLCs, corporations and partnerships have to report their business earnings to the Internal Revenue Service (IRS) and pay tax depending on those earnings. Essentially, the type of business structure you own determines the type of tax return you file.
If you are a sole proprietor, you are doing business as an individual and no separate income tax form needs to be filed for your business; you may simply add a schedule C page to summarize your business earnings and deductions. For any other business you own, you will need to submit a separate tax return for that specific business.
If you organize your business as a Limited Liability Company (LLC), your tax return choices are flexible. Generally, a limited liability company with one owner can acquire tax benefits as a sole proprietorship. You can also choose your LLC to be taxed as an S corporation, C corporation or partnership. In such cases, you need to file tax returns on the basis of the structure of your LLC. As a small business owner or a self-employed individual, you can claim various business deductions to reduce your tax liability. With strategic planning you can save on your tax successfully and effectively.
The following are some tax saving tips which will help you effectively cut down your tax bill:
- Office/home office expenses: If you have a home office and are operating your business from your own home, part of your expenses such as rent, repairs and maintenance cost, insurance and other utility expenses are considered deductible expenses.
- Equipment purchased: If your business incurred any expenses while purchasing office furniture, equipment, computer, machinery (used for business only) etc., they can be regarded as deductible expenses.
- Charitable contributions: Donations to charity is considered a deductible expense. You need to keep record of the donations such as acknowledgement from the charitable institution, cancelled checks or any other record to claim your charity properly.
- IRA or other retirement deposit: If you are a small business, establish a retirement plan and make the maximum contribution to it. IRA and other retirement deposits can be filed in your income tax return.
- Advertisement or promotional cost: if you have spent money or used goods for the promotion of your product or business, these advertising or marketing expenses are deductible. You can deduct it under the miscellaneous expense category.
- Health insurance for self employed: If you are self-employed and are paying health insurance for medical, dental or other long-term care for yourself, your dependents or your spouse, you are entitled to a special tax deduction.
- Business travel: Traveling expenses for business are considered as deductible expenses. You can include expenses such as the cost of transportation, taxi fare, shipping cost of business materials and other related expenses to travel expenses.
- Interest paid on business debt: You can deduct interest on business debt such as interest on loans, mortgages on property owned by business, annual credit card fees, penalties on bank overdraft and more from your income tax return.
Keeping record of all business expenses is important in order to claim your tax deductions legally. It is advised to seek the help of a professional tax consultant or tax planning service to carefully plan your income tax return.
