Starting a new business is a challenge. In addition to the late nights and long hours, business owners need to understand that typically, they won’t see a profit for 2-3 years. But don’t let that trick you into thinking you don’t have to file taxes! There are a variety of factors that determine how much revenue a business can earn without having to pay taxes, and no single formula will definitively answer the question. However, there are certain elements to consider that will help you make a reasonable estimate of what you and your business may owe. If you’re struggling to determine whether or not your business needs to file taxes, the tax experts at Sheppard Law Offices can help. Let our experts walk you through all the factors that determine whether or not your business needs to file taxes below!
Small Corporate Businesses
One of the biggest considerations when determining your business’ tax liability is your company’s designation. If you run a C Corporation, the IRS will treat your business as an independent taxpayer that is required to file and pay its own taxes. This type of business should use Form 1120 as a benchmark when estimating how much tax-free income it can earn before having to pay. This taxable income can be determined by subtracting business expenses and deductions from its revenue. This means that unless a corporation reports a loss, tax is always due.
There is a wide range of other types of businesses beyond C Corporations, and each has slightly different considerations when determining taxable income. These types include Partnerships, Sole Proprietorships, LLC memberships, S Corporation shareholders, and other small business owners who report their company’s earnings on their personal returns. These different business designations have more factors to consider when estimating how much income they can claim before having to pay taxes. This is due to the fact that they have to combine business income and non-business income on one return. This affects which tax bracket to use, what purchases can be itemized, deductions, and tax credit eligibility. Once you take these factors into consideration, you then may need to review the effects the alternative minimum tax may have on your deductions.
Businesses with Zero Taxable Income
Your taxable income can typically be found on 1040 forms, and is the final amount of your income that is taxable after applicable exemptions and deductions. This means that if you have zero taxable income (or less), you may not owe anything at all. One of the best ways to establish a reasonable estimate is to review your 1040 form and omit your business income. If you end up with a negative number for your estimated taxable income, you can earn at least that much of net profit without having to pay any income tax on it.
Using Tax Credits
Tax credits are a scaling reduction of income tax and can be used to offset how much you or your business may owe. They can be used to reduce the amount of tax typically owed on your income and can affect how much tax-free income your business can earn. For example, if you report $1,000 of taxable income and owe 10 percent, but are granted a tax credit of $100, they cancel each other out. This allows you to report $1,000 of taxable income but reduces how much tax is owed on that income.
The Tax Experts at Sheppard Law Offices
Whether you’re starting your first company or have just entered a partnership with an established business owner, your taxes will be complex. At Sheppard Law Offices, our Columbus tax attorneys can help you determine exactly how much your business will owe and how you can pay it. We work with you to find any possible deductions and exemptions to make sure you’re only paying what you have to, so you can focus on running your business. Contact our small business team for a free consultation, and learn all about how we can help you with your tax liability.