Business Taxation Meaning: Everything You Need to Know
The meaning of business taxation refers to the taxes that businesses must pay as a normal part of business operations.3 min read
2. Tax Liability
3. Calculating Business Taxes
The meaning of business taxation refers to the taxes that businesses must pay as a normal part of business operations. Whether you are a sole proprietor, partner, part of a limited liability company, or a corporation, your business is responsible for adhering to tax regulations. Each type of business will produce distinct tax consequences. Consider your business' tax concerns along with its non-tax concerns, so that you'll know which type of entity will help your business prosper and grow, or make it easier to pass on to heirs.
Types of Business Taxes
There are five major kinds of business taxes. They are:
- Gross-receipts tax.
- Corporate franchise tax.
- Employment withholding tax.
- Excise tax.
- Value-added tax (VAT).
In some industries, such as mining and insurance, companies will need to pay additional taxes. While businesses pay income tax, property tax, and sales tax, these taxes are not specific to business and are thus not generally considered business taxes. The reality of economic impact is that all taxes are "people taxes," as they impact people on a personal level.
As a small business owner, you need to manage many different expenses, including your business' taxes. Several aspects of your company will require taxation, as enforced by the government. The amount of money you owe to federal, state, and local tax authorities is your tax liability. Tax money will be used by the government to fund administration and social programs.
As tax liability is a legally binding debt, you are required to pay the taxes you owe or you may face government penalties. Tax liability is a short-term liability, which means that you must pay it within a year. Short-term liabilities, such as tax liability, may be recorded together in your accounting workbook or balance sheet.
Any transaction that has a tax consequence is called a "taxable event". The government has the authority to determine which events are taxable. Any time a taxable event takes place at your business, you'll need to pay the associated tax authority. Taxable income, issuing payroll, and making sales are all taxable events. Different taxable events will require different amounts of tax liability, which are calculated as a percentage of the total event.
Selling a product is a taxable event for which the government may charge you sales tax. Instead of paying sales tax out of your own pocket, you can include the amount in the total price that you charge a customer. After you collect sales tax, you'll need to report it and send it to the appropriate government agencies. You can pay sales tax on a regular basis (quarterly or monthly). Earning income is another taxable event. Federal and state income tax liability is based on a percentage of your earned income.
Calculating Business Taxes
It's important to understand taxation processes and to know exactly when and how to perform business and personal transactions, in order to reduce your tax obligations. As a business owner and a taxpayer, there are typically multiple ways to complete a taxable transaction, one of which will result in the lowest legal tax liability. Remember, it's smart to avoid taxes, but it's illegal to evade them through concealment or deceit.
You may be able to deduct business expenses if you are engaged in a "trade or business," which means that you are conducting business activities for livelihood or profit. The IRS defines a trade or business as one in which both a profit motive and economic activity are present.
All of your taxable income will be calculated according to the tax year. All income received or accrued during a single year is recorded on that year's tax return, along with expenses paid or accrued. Once the tax year ends, any tax-saving strategies must have already been applied.
You'll also need to report your accounting method to the IRS. The two basic methods most applicable to small business owners are "cash" and "accrual." Under some circumstances, you might be able to use a hybrid that combines components of both. In addition, certain kinds of businesses may be allowed to use special accounting methods.
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