Small business owners should understand the federal, state, and local tax and accounting requirements as this will help you with record keeping, filing tax returns accurately, and making timely payments to the government. Failure to file and pay tax obligations may result in financial penalties in addition to interest on amounts outstanding. Tax and accounting for small businesses can be complex; this guide serves as a starting point for resources and information to help you navigate your next steps – speaking with a tax professional.
Small business owners should remember these five important items that affect small businesses taxes:
- Business structure.
- Tax deductions.
- Startup costs write-offs (Deduct up to $5,000 only if total startup costs are $50,000 or less).
- Pay quarterly taxes.
- Keeping track of the amount of taxes due/refunded.
The business structure chosen when starting a business will determine the taxes small businesses pay, as well as how and when to pay them.
Review key tax calendar dates using the IRS Online Calendar. Exceptions: If the tax year does not start on January 1, follow the IRS fiscal year due dates. Also, be sure to review tax due dates by classifications of businesses.
IRS Tax Guides for Small Businesses
As a small business owner, it is important to understand your federal, state, and local tax obligations. The Internal Revenue Service (IRS) provides plenty of information to help small business owners when filing their taxes. The Small Business and Self-Employed Tax Center is the main resource for entrepreneurs. Additional resources include the following:
- Business Taxes – provides the five general types of business taxes and their tax forms.
- Small Business Tax Workshop – eight lessons to help small businesses learn how to file taxes.
- Online Learning and Educational Products – links to virtual tax workshops and SBA Learning Centers.
- Starting a Business – resources to new/prospective business owners and checklists for starting a business.
- Industries/Professions Tax Centers – specific industries tax centers.
- State Government Websites – links to each state website, and guidance to doing business in each state.
- Sale of a Business – tax guidelines to follow once a business is sold.
- Tax Guide for Small Businesses.
Accounting Methods
There are two primary accounting methods for businesses to report revenues and expenses – cash accounting and accrual accounting. It is important to understand the difference between the two, as once you select a method, you should maintain that for the duration of your business; unless, of course, you get an exemption from the IRS to change your method.
Cash accounting is an accounting method when revenues are recorded when payments are received and expenses are recorded when they are paid. Accrual accounting is when revenues and expenses are recorded when they are billed and earned, regardless of when the money is received and paid. Small businesses with average gross receipts of $25 million or less in the prior three-year period are allowed to use the cash method of accounting.
- Cash-Based vs. Accrual-Based Accounting – an explanation and differences.
- Pros and Cons of Cash and Accrual.
- Cash Flow Analysis for Small Business Owners – how cash flow analysis is conducted.
Tax Software
Small business owners may be overwhelmed when it comes to selecting software to prepare their tax returns or identifying tax professionals. Some key features to look for in tax software include budget-friendly, ease of use, excellent customer service, e-filing return options, and data security.
The most commonly used tax software include:
Accounting Software
Small business owners need to budget, track expenses, pay suppliers, categorize transactions, keep detailed, accurate books, and therefore require accounting software.
The most common accounting software for small businesses include:
Cloud-based accounting software is on-demand software hosted remotely for recording and storing encrypted financial data online. The pandemic forced many accounting teams to transition to work from home to follow local COVID-19 mitigation protocols. The workplace shift resulted in an increasing demand for cloud-based solutions.
A recent survey of more than 3,000 accounting professionals indicated that nearly two-thirds of businesses plan to adopt cloud-computing technology within the next two years.
- Advantages and Disadvantages of Cloud-Based Accounting Solutions.
- Business Software Marketplace – More than 300 cloud-based accounting solutions for small businesses.
- Sage Business Cloud Accounting – An example of a cloud-based accounting software.
Regardless of the tax and accounting software vendor that you use for your business, it is important to be aware of their cybersecurity safeguards.
Tax and Accounting Resources
Below are additional tax and accounting resources.
- 5 Things to Know About Your Balance Sheet – U.S. Small Business Administration.
- State Tax Obligations – U.S. Small Business Administration, identifies tax requirements by state.
- Common Small Business Tax Deductions – Provides the most frequent expenses deducted by small businesses. Additional Information for Business Expenses – IRS.
- Find a CPA – American Institute of CPAs.
- CPA Directory – searchable by zip code.
- Tax Rates for All 50 States – Federation of Tax Administrators.
- Employer W-2 Filing Instructions & Information – U.S. Social Security Administration.
- Small Business Taxes & Management.
Additional Resources
Are you already in business or thinking about starting your own small business? The SBDC has various small business resources available to you.
- Small business help topics – Small Business Information Center.
- Business reports – Small Business Snapshots.
- Industry-specific research – Market Research Links.
- Small business cybersecurity resources.
- Pandemic business resources – COVID-19 Publications.
Remember, you can receive free professional business advice and free or low-cost business training from your local Small Business Development Center!
By Todd Rausch, Regional Director for the Small Business Development Center at Western Iowa Tech Community College
