Tax Planning Basics: Stay on Top of These Key Types of Taxes in Your Business
It is extremely important to file all your taxes for the smooth functioning of your business. All businesses must mandatorily file all their respective taxes. The taxes to be paid are different for different types of businesses.
Moreover, business taxation depends primarily on niche, nationality, locality, precise size of your business, and some other factors too. As business owners and entrepreneurs are naturally very involved and busy in their business activities, often taxes are ignored unintentionally. But, neglecting your business tax obligations could prove to be a very costly issue.
When you fail to pay your business-related taxes promptly and on time, it could culminate in fees and penalties that could have a devastating impact on your business.
As the regulations are different from one business and locality to another, it is important to be acquainted with the different business structures and their relevant taxation regulations and rules.
Understanding the Different Business Taxation Structures
All income from businesses big or small, home-based, or online businesses are subject to taxation. You must, therefore, have a sound knowledge about the tax system and requirements that apply to your business to avoid legal ramifications.
Let's explore the basic business structures and aspects of tax filing you need to know to stay on top of your taxes.
I. Legal Business Structures for Taxation
To ensure you pay the correct taxes for your type of business and situation, you must register your business in the right legal structure right from inception.
In the U.S, there are four main types of business structures: sole proprietorship, partnership, limited liability, and corporation. Each of those structures has different tax, income and liability implications, which means you must be very careful to choose the right structure for your type of bussiness.
Basically, choose a sole proprietorship if you are planning on being self-employed and running your small business by yourself, and a partnership if you’ll be sharing ownership of your new business with two or more individuals.
A limited liability corporation (or LLC) is a good option if you have substantial personal assets that you wish to protect and not involve in your business. As the name suggest, this structure limits the liability of those involved and may be the best option if you run a business in an industry where lawsuits are common.
A corporation is recommended for larger and more established companies with many employees and outside investors, and companies that will be scaling quickly. Here you can register the standard C corporation, the small business S corporation, or the benefit corporation or B corp. The C corporation is the classic legal entity of the majority of successful companies in the U.S.
The corporation structure will give you the most limited liability possible and you may even be able to sell stock to raise capital. But corporations are more difficult to set up. You may also have to contend with double taxation for a traditional C corporation, where you’ll be responsible for both income taxes on earnings from the corporation, as well as paying taxes on dividends received from the corporation.
On the other side, you can register a nonprofit business, which is a great option if you are starting a business whose mission is charitable, educational, religious, literary scientific—essentially, “not for profit” businesses that qualify for tax-exempt status.
II. Tax Requirements & Penalties for Businesses
You must recognize the importance of taxes and remember that it is one of your mandatory business obligations. You simply cannot ignore or postpone the filing of taxes.
In the event you postpone your tax payments, be prepared to face heavy penalties and fines. It is your responsibility to clear all tax payments on time.
Pay all your taxes on time to avoid the following penalties associated with late payment or non-payment of taxes:
- Failure to File Taxes: In this case, you would be facing a failure-to-file penalty. This penalty would be 5% of the tax that remains unpaid for each and every month the tax return was actually late.
- Failure to Pay Taxes: Suppose you have managed to file all your taxes but could not pay for it, you would be facing a penalty of 5% of the total unpaid tax amount extending over each and every month when the payment is delayed.
Moreover, you would require paying interest on the total unpaid money, on top of that.
The amount of tax penalties can start to accumulate and create a huge financial crisis situation for you and also for your business.
Additionally, in the event that you fail to timely submit your taxes, the U.S. Internal Revenue System (IRS) could also do the following:
- It may file an order for claiming parts of your own property.
- It may take away all your business property.
- It may compel you to give up all your refunds.
- It may revoke your official documents such as licenses, passport, and other important documents.
You must keep abreast with the current tax-file regulations and make it a point to file taxes regularly and on time to avoid penalties.
In addition, stay on top of all your business debts. You need to maintain a healthy financial situation in order to pay your taxes promptly.
Manage your business debts well, and if necessary consider debt consolidation services so that you are not bogged down by overpowering debts.
Common Types of Business Taxes & Payment Strategies
You must realize the pivotal role of taxation in your business' success. Successful businesses actually depend on a perfect tax strategy for decreasing their ultimate tax burden.
Taxes are just not popular with a majority of businesses, because they can be detracting from a business’s bottom line and profitability. However, for your business to be successful, it is important to have a robust tax strategy that effectively takes advantage of all the existing credits that the tax code presents, as well as any legal loopholes.
An effective business tax policy and strategy can help your business to effectively cut down its tax liability and help in boosting profitability.
Let’s look at some of the different types of business taxes and effective strategies you can use to meet your tax obligations.
1. Income Tax
Income taxes are known to come up with the maximum tax burden to businesses in the United States. The corporate tax rate in the United States has been 34.6% since 2011, which was almost 50% higher as compared to the tax rate in other developed nations.
However, the Tax Cuts and Jobs Act of 2017, the most sweeping tax legislation since 1986, changed the top corporate tax rate from 35% to one flat rate of 21%. This rate will apply to corporations whose tax year begins after January 1, 2018, and it is a permanent change.
The corporate tax rate will also be effective to LLC's that have elected to be taxed as corporations. This rate does not apply to S corporations.
Some businesses, however, have been able to reduce substantially their tax liability in the past by taking advantage of certain existing provisions and loopholes in the US corporate tax code.
2. Value Added Tax
Since Jan 2018, the corporate income tax in the United States has become quite competitive. But, in the past, the U.S. had a very high corporate income tax rate of nearly 35% that was certainly among the highest in the world.
Many countries across the world that boast of low corporate taxes, like Poland and Ireland, actually have really burdensome Value Added Tax (VAT). VAT is a tax on consumer spending collected by VAT registered traders on sales of goods and services. It is necessarily a national sales tax.
In this context, you must understand that Ireland had only 12.5% corporate income tax, but its VAT was almost as high as 21%. This exposed businesses drastically to a substantial tax liability.
Fortunately, the United States does not assess any VAT upon its businesses. We know that successful international businesses would be taking into consideration such taxes while analyzing and determining locations to conduct business successfully.
Today, U.S.A. based small businesses selling digital products in EU nations require accounting for the latest VAT or Value-Added Tax regulations. The new 2015 Value-Added Tax rules ammendments that went into effect on 1st January 2016 are applicable to all those organizations selling digital products in any of the European Union member nations.
3. Sales Tax
In the U.S, 45 states actually levy a sales tax. However, these states are known to offer a broad spectrum of tax exemptions. Most of the flourishing businesses are well conversant with these tax exemptions and they know how to take the maximum advantage of the exemptions.
An instance of a common sales tax exemption allowed by states like Ohio is associated with the exemption of sales tax on the purchase of raw materials, equipment, and other supplies required in the production or manufacturing process.
Take advantage of such tax exemptions to reduce your tax burden.
4. Federal Business Energy Tax Credit
The American Recovery and Reinvestment Act of 2009 came up with a striking tax credit for organizations that are investing in specifically renewable energy sources.
We understand that the Federal Business Energy Investment Tax Credit also permits a tax credit of a maximum 30% of expenditures associated with renewable energy systems, like fuel cell, solar and even wind turbines.
Such credits go a long way in helping businesses prosper through decreased environmental impact and reduced tax liability.
Even though, initially, taxes can seem overwhelming, you can get the hang of them simply by becoming more proactive to learn and stay updated on the tax laws.
Understanding the importance and pivotal role taxes play in your business can give you the impetus to stay on top of them and a marked edge for long-term success. It is certainly not a difficult task to be on top of your business taxes, especially if you stay informed and plan properly to pay your taxes, reduce your debt burden, and attain your business’ financial goals.
Remember, if you want your business to prosper, it is mandatory to pay your business taxes in full and on time. The advantages of doing so can be enjoyed by both small and large businesses.