Last week we quizzed our readers on how well they can explain the tax codes related to their personal return. This week we have a similar question: How well do you understand the tax codes related to your business?
More than half (54%, to be exact) of all U.S. sales are from small businesses. Just like the other 23 million small businesses in the nation today, you’re probably running the majority of the business operations by yourself. With so much on your plate, it’s a great idea to have a quick business tax refresher to make sure you’re up to speed with new regulations, aware of common mistakes that business owners make, and using the tax codes to your benefit, like business deductions, which can be like discovering a treasure trove of money-saving ideas.
So in our final installment of our tax interview series, Christopher Johnson, a Rocket Lawyer OnCall® tax attorney, answers our most burning business tax questions so you can go on and do what you do best: your business.
First, what is one of the biggest mistakes employers make?
A lot of companies would rather choose independent contractors for reporting purposes but many employers don’t seem to know the differences and definitions of these two terms, which can be a risky move since misclassifying your workers can get you in trouble with the IRS. There are certain requirements to qualify as an independent contractor. States also have different qualifications.
What if you’re self-employed? Is it worth documenting that you work from home?
Usually, if the space at home is devoted exclusively for business, it’s worth documenting that you work from home. People can take the value of that space and deduct it. If you’re spread out on a dining room table, you can’t deduct that because it isn’t exclusively used for the business. Things like mortgage, interest, insurance, utilities, and repairs can be deducted if it’s exclusively devoted for business purpose. It might be worth it for some folks.
Can you deduct your workspace if you’re an Etsy seller?
Crafters, who sell online and have space solely devoted to making crafts that they sell online, can deduct their devoted craft space.
How else can you save money? What else can you deduct for business?
One of the most commonly forgotten things to deduct is business travel mile by vehicle. Currently, the deduction is at 57.5 cents per mile. If you have receipts to back it up, you can deduct actual car expenses and more.
But what if your business is internet-based? Where do you owe tax?
Generally, if you have a physical location for your business, then you’ll have to collect sales tax from your customers. As for internet-based businesses, some states have adopted tax rules that require these types of businesses to collect sales taxes while other states still haven’t followed suit so it’s important to check with your state to make sure your business is staying compliant.
So what if you work in different states? Do you owe income tax to each state?
It depends on the local and state rules, like where the income is withheld.
Let’s say your business went under this year. Are there things you should be aware of when doing taxes? Can you just “let it go”?
It depends on the state, and if your LLC will automatically close or not. In California, you would go on a suspended status, but the state tax board will probably go after back taxes. The minimum tax rate in California would be the debt of the entity, not personal debt.
Are there any common concerns for local and state taxes?
Be aware of local county or city taxes, like on business licenses. Los Angeles County and other counties charge tax on the value of the assets, similar to a property tax rate. You’ll have to fill out a form and report the value of your business.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.