Business Owner Tax Considerations

Running a business can be quite intricate with various aspects to manage and one key element is handling taxes. Tax deductions are essential in lowering a business owners' income, which can result in potential savings. In this article we will explore the deductions that are accessible to business owners the Qualified Business Income (QBI) deduction and how the choice of entity structure influences this type of planning.

Deductions for Business Owners

Business owners (and other self-employed people) have the opportunity to utilize a range of deductions to decrease their taxable income. Typical deductions encompass expenses related to business operations like rent, utilities and employee wages. These costs are fundamental for business activities and are typically deductible. Furthermore, expenses for business related travel, meals and entertainment may also qualify for deductions if they directly pertain to the business.

For instance, when a business owner travels for meetings with clients or partners expenses such as transportation, accommodation and meals can be considered as deductible business costs. Similarly, expenses incurred on meals and entertainment while conducting business can also be eligible, for deduction.

It's crucial for business owners to maintain records of these expenses to ensure they are properly managed when tax season arrives and work with a tax preparer to ensure proper reporting.

The Qualified Business Income (QBI) deduction

is a common deduction that eligible business owners can take advantage of. This deduction allows them to deduct up to 20% of their business income resulting in savings on taxes. To qualify for the QBI deduction the business must fall under a pass-through entity category like a proprietorship, partnership, S corporation or LLC. A financial planner in conjunction with an attorney can help implement the appropriate entity type for your situation. 

For those business owners who meet the eligibility criteria the QBI deduction can lead to significant savings. It's important for them to grasp the requirements, for this deduction and how it can positively impact their strategy.

Choosing the entity structure for your business is essential when it comes to tax planning. The type of entity you select can greatly influence your tax obligations. For instance, establishing a Limited Liability Company (LLC) can offer pass through taxation advantages enabling business owners to sidestep taxation on profits.

When considering business entity types it's important to weigh the pros and cons. For instance, opting for a C corporation could potentially mean tax rates but may also lead to double taxation, where both the corporation and shareholders are taxed on profits. Understanding these implications is crucial for business owners aiming to reduce their tax burden. 

Self-Employment Tax

is an additional kind of tax that self-employed individuals need to pay to the government. Unlike employees who have their taxes deducted from their pay by their employers self-employed people need to figure out and pay their taxes. This tax is on top of income tax. Is meant to cover the persons part of Medicare and Social Security contributions.

The self-employment rate usually stands at 15.3% of a person's earnings, which includes income from self-employment activities like freelance work, consulting or managing a small business. This rate covers both Social Security and Medicare taxes with 12.4% allocated for Social Security and 2.9% for Medicare.

It's crucial, for these individuals to monitor their earnings during the year and save money to meet their tax responsibilities. They can achieve this by making estimated quarterly tax payments to avoid facing a tax bill at year end. Failing to pay self-employment tax could lead to penalties and interest charges imposed by the IRS.

As noted above self-employed individuals have deductions available that can help reduce their taxable income and lower their burden.

In summary, when making decisions that impact tax responsibilities business owners should carefully assess deductions, QBI benefits and entity structure. By grasping these factors and seeking advice from both your financial planner and tax professional, businesses can optimize their strategy, lessen their overall irs burden and effectively manage taxes.

-https://www.irs.gov/businesses/small-businesses-self-employed/business-expenses

-https://www.irs.gov/newsroom/qualified-business-income-qbi-deduction

-https://www.irs.gov/businesses/small-businesses-self-employed/business-structures

About the author:

Paul Carriere CFP® provides fee-only financial planning and investment management services in Colorado Springs, Co. Carriere Financial Planning serves clients as a fiduciary and never earns a commission of any kind. Paul has over 10 years of experience as a financial advisor in Colorado Springs. 

* This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities.