Tax return questions from small business owners are one of the most common things CPAs get asked about.
According to a recent tax literacy survey done by the American University in Washington D.C., “37 percent of the small businesses and the gig workers surveyed struggle with feelings of anxiety and confusion about how to file taxes.”
You shouldn’t have to feel that way. We believe that you deserve to be able to think about your small business taxes without losing sleep, breaking into a sweat, or feeling helpless. In this post, we’ve got 10 of the most common tax return questions we regularly receive…and the answers you need to crush your taxes this year.
10 Common Tax Return Questions
1. What forms do I need to file small business taxes?
The study from American University also found that even though the majority of the people they talked to had college degrees, only a few of them said they were ever taught how to prepare taxes in their business classes.
The first step in successfully filing your taxes is knowing which forms to fill out. There are currently over 800 IRS tax forms and schedules.Here are the ones most small business owners need:
- Sole Proprietorships
- Form 1040, Individual Income Tax Return
- Schedule C, Profit or Loss From Business (sole proprietorships)
- Partnerships
- Form 1040, Individual Income Tax Return
- Form 1065, U.S. Return of Partnership Income
- Form 965-A, Individual Report of Net 965 Tax Liability
- Schedule E, Supplemental Income and Loss
- LLCs
- Form 1040, Individual Income Tax Return (if one owner)
- Form 1065, U.S. Return of Partnership Income (if multiple owners)
- Form 1120, U.S. Corporation Income Tax Return (if the owner has used Form 8832, Entity Classification Election to be considered a separate corporation)
- Form 1120-S, Income Tax Return for an S Corporation (if the owner has further elected to set up their company that way)
This is a simple overview of the main forms these entities use, but there are many others that may be necessary depending on your individual situation. For the best results, contact a CPA who is good at tax prep.
(Additional forms that are needed to properly calculate and file your taxes are mentioned throughout the rest of this post as well.)
2. How do I calculate my home office deduction?
If you run your business from home, you can use part of your office or work space as a deduction at tax time. It is recorded on Schedule C for sole proprietors, LLCs, and partnerships and calculated using Form 8829.
According to IRS FAQs on the Simplified Method for Home Office Deduction, “You determine the amount of deductible expenses by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the smaller of the portion of a home used in a qualified business use of the home, or 300 square feet. The prescribed rate is $5.00.”
A “standard method” is also available, but it is a little more complicated to calculate. However, if your home office situation goes beyond what is most common, it may be worth contacting your CPA to have them see which method gives you the most savings.
3. How do I know if my business meets Qualified Business Income (QBI) eligibility?
QBI is a tax deduction that lets qualifying small business owners and other self-employeed individuals deduct up to 20% of their small business income on their taxes.
Generally speaking, QBI is for people with “pass-through income” (income reported on their personal income tax returns). For 2023, total taxable income must be under $182,000 for single filers, and $364.200 for joint filers.
For people with incomes above that or with unique circumstances, Nerdwallet has a good article with more details about “QBI: What It Is & Who Qualifies”.
4. What can I deduct for small business expenses?
Deducting business expenses can be one of the best ways to significantly reduce your federal taxes each year. You spend lots of money operating your business, and the IRS allows you to use quite a bit of those expenditures as a way to lower the amount of income you are taxed on.
According to the IRS (in Publication 535), “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.”
Our post on “16 Small Business Tax Deductions To Really Save You Money This Year” is a good place to start learning about what all you can claim.
Deducting business expenses can be one of the best ways to significantly reduce your federal taxes each year.
5. What tax credits are available for small businesses?
A credit can be more valuable than a deduction when it comes to taxes. Where a tax deduction reduces your taxable income, a tax credit reduces your total tax liability. If your tax burden for this year ended up being $5,000 and you qualified for that much in tax credits, your liability would be $0. (If your credits are greater than taxes owed, you’ll get a refund.)
There are many credits available for small businesses. The U.S. Chamber of Commerce lists 10 commonly overlooked small business tax credits that are worth looking into. The IRS has a full list of business tax credits listed on their site.
Our Tax Services pros can help make sure you take advantage of every credit you’re entitled to.
6. How do I handle payroll taxes, including withholdings and reporting?
Every business that has employees on its payroll is responsible for withholding (and paying) certain taxes each time you pay your workers.
- FICA (Social Security and Medicare)
- FUTA (Federal Unemployment Taxes)
- SUTA (State Unemployment Taxes)
- Local payroll taxes (if you live in certain areas)
In addition to sending either monthly or bi-weekly payments to the IRS, you also need to use Form 941 to make quarterly reports on withholdings.
You can learn more in this video the IRS put together on managing payroll to withhold the correct amount of taxes, or this post we did on “Why Your Small Business Payroll Taxes Matter”.
7. Are there any tax implications if I hire independent contractors vs employees?
You can avoid the payroll tax frustrations we just mentioned by hiring independent contractors instead of in-house employees. 1099 workers are responsible for their own employment taxes, health insurance, and retirement.
However, a word of caution: be sure the person you hire as a contractor isn’t going to be seen by the IRS as an employee. If they meet certain criteria and you haven’t been properly withholding taxes, it could result in serious trouble.
Read more on “Why It Matters To Know the Difference Between Employee and Contractor.”
…be sure the person you hire as a contractor isn’t going to be seen by the IRS as an employee.
8. Can I carry forward business losses for taxes?
A Net Operating Loss (NOL) in one year can be deducted from profits in following years in order to reduce your tax burden in the future.
For example, without an NOL provision if you realized a $50 loss in year one (-$50; no taxes on that) and $100 in year two, at a 22% tax rate you would pay $22 in year two.
But because the IRS allows for NOL to be carried forward, your loss in year one can be subtracted from the $100 profit in year two before taxes are applied. That means you’d be taxed on $50 in year two and only pay $11 instead of $22.
9. What are quarterly estimated tax payments?
Quarterly estimated tax payments are taxes you send to the IRS four times a year (depending on how much income you make). Independent contractors and self-employed small business owners who owe at least $1500 in taxes must use Form 1040-ES to estimate and pay those.
The folks at Ramsey Solutions also have a good article that answers “What Are Quarterly Taxes?”
10. What are the small business tax record-keeping requirements?
For this one, we’ll just let the IRS speak for themselves (“How long should I keep records?”.
- Keep records for 3 years if situations (d), (e), and (f) below do not apply to you.
- Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
- Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
- Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
- Keep records indefinitely if you do not file a return.
- Keep records indefinitely if you file a fraudulent return.
- Keep employment tax records for at least 5 years after the date that the tax becomes due or is paid, whichever is later.
Got More Tax Return Questions? We can help.
These 10 small business tax return questions just scratch the surface of what owners like you face year after year. Our team of small business and accounting experts can help you navigate whatever you’re facing. We’ve got 40+ of experience, and we understand what you’re going through. Schedule a call today to get the help you need and the answers you’re looking for.
