Business Taxation: Everything You Need to Know
Business taxation is important to understand. All taxes, including business activity taxes, are “people taxes” and have an economic impact.3 min read
2. What Is a Value-Added Tax?
3. Choosing the Returns You Must File
4. Do All Businesses Incur a Corporate Income Tax?
5. Tax Advantages for Businesses
6. Responsibility to Pay Taxes
Business taxation is important to understand. All taxes, including business activity taxes, are “people taxes” and have an economic impact. Since only people can pay taxes, the tax burden ultimately falls on various groups of people. Business taxes include corporate franchise tax, employment tax, excise tax, gross receipts tax, and value added tax, VAT.
How Are Applicable Taxes Determined?
All firms must pay certain taxes, including:
- Sales tax
The type of business a person owns will determine additional taxes they may pay. For example, insurance, mining and petroleum extraction companies are required to pay additional taxes specifically related to their industries. It is not uncommon for firms to pay a fee for doing business in a particular jurisdiction.
What Is a Value-Added Tax?
A value-added tax, VAT, also referred to as a goods and service tax is a consumption tax that is placed or assessed incrementally. The amount is based on the increase in value of the good or service at each stage, from production to point of sale. It avoids the double taxation of a direct sales tax because the producer or distributor does not get burdened with the tax. The end consumer ultimately catches the full brunt of the tax.
Choosing the Returns You Must File
There are several return types and the one you file depends on your business structure. Sole proprietors and any other business structure with a pass-through structure file Form 1040. A pass-through structure allows owners to report business and expenses as part of their personal tax return.
If you operate as a C corporation you will submit a copy of the 1120 Form and S corporations will submit the 1120s Form. Both nonprofit organizations and general partnerships will use information returns. Nonprofit organizations will use the 990 Form and general partnerships will use 1065 Form. Business-related returns will vary and may include sales and usage tax, payroll taxes and other specific state and local taxes. Also, the Form 1040-ES will include the estimated tax payments.
Again, the tax rates will vary depending on the business structure you operate under and the type of business you have. Sole proprietors will file their return and face normal federal income tax rates on any revenue they generate through their self-employment. These rates can go as high as 39.6% and as low as 10%. This is also applicable to any business owner with a pass-through business structure, such as S corporations and partnerships. Take note, this does not include the 15.3 self-employment tax you may be subject too, nor any state or local taxes.
Do All Businesses Incur a Corporate Income Tax?
It is most likely that you will incur a corporate income tax if you operate as a C corporation or an LLC. This is based on the amount your corporation earns and essentially, the more you earn the more you pay in taxes. Tax rates start at 15% and go up to as high as 39%. Depending on where you conduct your business, you may have state and local corporate taxes as well.
Tax Advantages for Businesses
A big advantage at tax time for business owners is the opportunity to deduct every single business-related expense. Of course, individuals do not get to write off near as many deductions.
For example, as a business owner, you can deduct 50% of any business-related meals and entertainment. In addition, vehicle expenses, home office expenses are all eligible deductions if they are in some way related to your business. This means your deductions can range from paper clips to high-powered computer servers as long as you document and keep your receipts to prove your deductions at tax time.
Responsibility to Pay Taxes
Conversely, being your own boss and having huge deductions also comes with having a huge amount of responsibility. You are required to make sure your local, state, and federal taxes are submitted and paid in a timely manner, along with withholding taxes from employee's wages. In addition, you are responsible for preparing and filing a W-2 form for each employee.
On top of all the tax responsibilities, you must comply with federal and state business license laws as well. There are a great many advantages for business owners as long as owners are willing to adapt to the roles and responsibilities that come with a successful thriving business.
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