June 14, 2022

Small Business Taxes: Budgeting for End-of-Year Expenses

How can a small business owner prepare for end-of-year accounting expenses? Here are some tips to consider.

For many small business owners, the end of the year is the busiest time on the calendar.

You’re busy setting the stage for a new year of fresh opportunities, but you’re also trying to tie up any loose ends from the current year. 

In addition to the day-to-day responsibilities of running a company, you’re probably thinking about gifts, parties, and other holiday responsibilities in November and December. The last thing you want to think about is figuring out your end-of-year taxes. 

How To Start Budgeting for the End of the Year

  • Determine your state tax obligations
  • Determine your federal tax obligations

By planning ahead of time, you can prepare for tax season and significantly reduce your stress. Below, Hoist offers some advice on budgeting for small business expenses.

Determine Your State Tax Obligations

As with federal taxes, most states use tax tables to help small business owners figure out the state taxes they owe. Visit your state's website or contact the small business administration (SBA).

Certain states do not impose state taxes on income, meaning small business owners don't have to withhold state taxes in those jurisdictions. These include:

  • Wyoming
  • Washington
  • Florida
  • Texas
  • Alaska

You also don't have to withhold state taxes if you operate in Arizona or Pennsylvania.

Determine Your Federal Tax Obligations

As an employer, you must withhold federal income taxes on every paycheck for the applicable period. The Internal Revenue Service (IRS) provides tax tables to help small business owners calculate how much they should withhold, including percentage tables and wage bracket tables.

You can access the percentage tables for five payroll periods, including daily, weekly, bi-weekly, semi-monthly, and monthly, and the tables are segregated by filing status. You will need to take the value of claimed exemptions from the wages and then use the appropriate table according to the employee's filing status to find the correct withholding amount.

The IRSwage bracket tables segregate the same five payroll periods. You can figure out withholding amounts by choosing the appropriate wage bracket for each employee and finding the filing status across the table.

It's up to you, the business owner, to observe the two sets of tables and decide which is best for your situation. With payroll periods, the percentage tables are more inclusive.

If several groups of employees get paid in different payroll periods, it makes sense to use the percentage table. For example, if you pay your employees quarterly, you should choose the percentage tables over the wage bracket tables.

What Are the Tax Considerations for Small Businesses?

  • Estimated taxes
  • Payroll tax
  • Sales tax
  • Business gifts and entertainment expenses
  • Travel expenses
  • Advertising
  • Other taxes

Budgeting and planning for taxes is the best way to keep your stress levels down and prevent a slew of financial and legal issues that could cripple your company. There are many monthly and occasional business expenses to consider.

Estimated Taxes 

Many new business owners get hit with a hard surprise in April. 

After filing their first small business tax return, they find out they owe much more than they thought. Why?

They didn't pay quarterly estimated taxes during the previous year of operations. 

When you are an employee, your taxes are automatically deducted from your paycheck by the employer throughout the year. Then, you typically pay whatever in taxes you owe when you file, or you get a refund for overpaid taxes. 

It's not quite as simple when you're a business owner. 

Business owners usually pay estimated taxes at the end of each quarter, which depends on how much they made during the three-month period.

If you miss the quarterly deadlines, it can be costly. Plus, the penalties increase in severity the more times you neglect to pay estimated taxes. The more you owe and the longer you don't pay, the higher the penalties.

Two Methods of Calculating Your Estimated Taxes Quarterly:

  1. If you make a consistent income throughout the entire year, you can simply figure up one year’s worth of income and deductions. Then, calculate the taxes you will owe and divide them by four.
  2. If your income is sporadic throughout the year, you will need to determine what you owe every quarter by factoring in the money you've earned and spent so far in the year.

If you base your estimates on the entire year, it's possible to underpay or overpay your quarterly tax payments. However, it's relatively easy to make corrections in the next quarter. Your payments will likely be more accurate if you figure out your taxes each quarter. Understand, however, that this method requires more time and energy.

Payroll Tax

The payroll taxes you owe on your employees will depend on your established payroll system.

You can deduct the cost of wages and salaries for your company and even specific employee benefits. Additionally, you can deduct your business portion of FICA taxes, federal and state unemployment taxes, and workers' compensation fund payments.

Sales Tax

You are required to file a sales tax return, no matter what type of business you run. If you fail to do so, you can face various fines and legal problems. It's essential to understand your small business's tax obligation, including the sales tax rate. 

Example of Sales Tax

The sales tax rate might seem easy enough; it's simply the price of an item plus the sales tax amount. So, if you sell an item for $12 and your state sales tax is 7%, your customer will pay $12.84.

However, that scenario assumes that the same rate applies to all your products and that you only sell items in person. In reality, you must consider various sales tax rates and establish different tax groups in your records.

Three Types of Sales Tax

  1. In-store sales
  2. In-state sales
  3. Out-of-state sales

In-store sales refer to anything sold in your store directly to customers or from a trade booth or vendor. 

In-state sales affect customers in your state. If your state operates on an origin-based tax method, this is a simple calculation and doesn't include county or local sales taxes. Your in-state sales will demand more attention if there is a destination-based method or different sales taxes in your state.

When you sell to buyers in other states, they pay the tax rate in the state they reside in.

Business Gifts And Entertainment Expenses

Giving gifts to your clients and employees is an excellent way to build rapport. As a business owner, it's also important to consider that gifts bear specific tax implications. 

Whether a gift is tax-deductible will depend on whether it is tangible property, a gift card or certificate, or an award. Do your due diligence to figure out which gifts are deductible, and be sure to keep records for your taxes.

Travel Expenses 

You want to keep track of all your small business's hotels, meals, and air travel during trips. 

You can only deduct half of your business meal expenses. Nonetheless, it's important to keep receipts and consider them in your budget and taxes.

Advertising

In your tax plan, you will also want to include the monthly costs of all your social media marketing and other advertising activities (e.g., online ads, billboards, newspaper ads, etc.). Additionally, you can throw web maintenance expenses in this mix or put them under your office expenses. 

Other Taxes

Let's cover some of the other common taxes to consider for your small business filing each year:

  • Location expenses
  • Equipment and furniture
  • Office supplies
  • Transportation costs
  • Maintenance and services

Location Expenses

No matter where your business operates, there is a cost that comes with the location. If you have a mortgage on a commercial building, you can deduct the mortgage's interest. You can also deduct the depreciation expense for the year.

Say that you lease a building or other type of commercial space. In that case, you can deduct all costs associated with the lease, including the lease payments themselves. Because the lease is not an asset that your company owns, you cannot deduct depreciation expenses, and you are restricted to deducting only one year of payments.

Furthermore, consider the utility costs for your rented or owned building. Costs like water, gas, electricity, and other city services can be deducted. However, some of these expenses could be included in your lease payment, so keep that in mind as you plan.

Even home-based business owners can score deductions on their taxes. Depending on the space used exclusively or regularly for business purposes, you may be able to deduct some of the expenses that come with your home.

If your office space is small enough, it's easy to calculate how much to put on your tax return. Additionally, you can deduct the cost of a second phone line if you use it for business, as well as any long-distance calls related to your company.

Equipment and Furniture

The IRS allows small businesses to deduct the cost of capital assets as long as you depreciate them, meaning you spread the expenses over several years. 

Capital assets include everything from computer equipment and machinery to retail shelving and office furniture. 

With that said, complying with IRS regulations and calculating depreciation is a complex process that is best left to tax professionals. It's also critical to understand that specific types of equipment your small business buys are technically "listed property."

Trucks, cars, and any property used for recreation or entertainment are the most common categories of listed property. If you want to take advantage of listed property deductions, you must separate business and personal expenses and deduct only the business portion.

Office Supplies

Also, remember that you can deduct the total cost of supplies and materials your office uses throughout the year. As long as it doesn't distort your income, you can even deduct incidental supplies and materials, regardless of whether you take inventory or put them on record.

Transportation Costs

As with other assets, the cost of any car or truck your business purchases depreciates. As long as a vehicle is driven at least half the time for business purposes, you will be eligible for a deduction.

Nonetheless, this is one of the primary red flags for IRS small business audits, so you will want to keep thorough records. Furthermore, you can take a standard deduction or deduct the actual expenses of driving your vehicle for business purposes.

Maintenance and Services

If your business rents or owns a facility and equipment, you will incur maintenance costs throughout the year. You may also have to pay for several other outside costs, such as lawn mowing, snow removal, building repair, etc.

While you can deduct these costs from your taxes, it may work in your favor to depreciate some of them. The best approach is to consult your tax professional.

Factors Affecting Whether Your Small Business Gets a Tax Refund

  • Business entity
  • Type of tax

Generally, taxpayers only receive a refund if they paid more than they owe on the return, and it works that way for businesses as well. As with taxpayers, however, a small business's tax refund eligibility depends on the specific type of business in question. The tax type also plays a role.

Business Entity

The type of business entity you formed when starting your business determines how you pay taxes to the state and the IRS. If you are like many other small businesses, you established an entity that passes business income to the owners.

Then, the owners are taxed according to their personal income tax returns. These business entities do not pay the tax directly to the IRS:

  • Sole proprietorship
  • Partnership
  • S-Corporation
  • Limited liability company (LLC)

Because they do not pay directly to the IRS, they are not eligible for refunds.

C-corporations are the only business entity eligible for a tax refund. This is because the profits of C-corporations are taxed separately from their owners under the Internal Revenue Code subchapter C. That is, they use Form 1120 to pay income tax directly to the IRS. 

If you have a C-Corporation that overpays in estimated tax, you might receive an income tax refund reflecting the personal returns of the owners, partners, or shareholders. 

Type of Tax

Whether or not your small business qualifies for a tax refund depends on the type of taxes you pay. Here are some examples:

Income Taxes

As discussed, only C-corporations can receive an income tax refund. So the owners, partners, or shareholders get a refund, depending on their total income.

Payroll Taxes

Your small business could receive a refund if you withhold and overpay payroll taxes, no matter what kind of entity you have. 

If you own a restaurant, look into tip credits, which you can claim to recoup the FICA taxes paid on employee tips. You can use this tax credit to lower the income tax your business owes, potentially leading to a refund.

Sales Taxes

Most companies must pay sales or excise taxes. Generally, states or municipalities evaluate these taxes. Sometimes, a property value reassessment or overpayment of sales or excise taxes can lead to a refund.

In most cases, your small business will be eligible for a refund if it pays more tax than its actual liability. However, business taxes are anything but simple. They are often complicated, and it can be challenging to know what your company is being taxed on, how much you owe, and whether or not you should expect a refund.

If you do not currently have a certified public accountant (CPA) or another type of qualified tax preparer in your corner, now is the time to find one.

How To Get the Most From Your Small Business Tax Refund

  • Review your statements
  • Research tax credits
  • Embrace 401(k) matching
  • Office other employee incentives

One way to ensure a big refund in April is to withhold more tax than necessary. But keep in mind that overpaying on your small business taxes will leave you with less working capital for day-to-day operations and growth. Here are a few other tips to consider:

Review Your Statements

It's essential to keep your business and personal finances separate. However, just in case you commingled your funds now and then throughout the year, review your personal bank and credit card statements so your accountant will know of any expenses to include on your tax return.

Research Tax Credits

Your small business might be eligible for one or more state or federal tax credits. Do your research and speak with your accountant about applicable credits for this year or the future.

Embrace 401(k) Matching

Does your business provide 401(k) plans to your employees? You might consider matching those plans, as the contribution amount matched can qualify as a business expense.

Offer Other Employee Incentives

Another way to be nice to your team members is to provide gifts, awards, bonuses, and other incentives throughout the year. Along with boosting morale, you can deduct specific incentives. You can find out what types of incentives qualify by looking at the IRS's guidelines for fringe benefits.

What To Do Next

Small business taxes are complex. Nonetheless, it's up to business owners to keep up with what they owe and plan accordingly to avoid being in a bad spot when the end of the year rolls around.

Use the information and our advice to budget for all the necessary expenses and take the appropriate tax deductions. If you're in the planning stages of your business, work with Hoist to get up and running quickly.

Sources:

Quarterly Taxes: Everything Small Business Owners Need to Know | Gusto

Principal Place of Business | NerdWallet

Publication 15-B (2022), Employer's Tax Guide to Fringe Benefits | Internal Revenue Service

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