Small Business Industry Specific Tax Regulations
1. Business Structure and Tax Implications
- What It Is: The tax obligations of a small business vary depending on its legal structure—sole proprietorship, partnership, limited liability company (LLC), S corporation, or C corporation.
- Who It Applies To: All small businesses must choose a legal structure.
- Tax Implications:
- Sole Proprietorship: Income is reported on the owner’s personal tax return, subject to self-employment tax.
- Partnership: Income passes through to partners, reported on their individual tax returns.
- LLC: Can be taxed as a sole proprietorship, partnership, or corporation, depending on elections made.
- S Corporation: Income, deductions, and credits pass through to shareholders, avoiding double taxation.
- C Corporation: Subject to corporate income tax; dividends paid to shareholders are taxed again on their individual returns (double taxation).
- What It Is: Small business owners who are self-employed must pay self-employment tax, which covers Social Security and Medicare taxes.
- Who It Applies To: Sole proprietors, partners, and LLC members who are treated as self-employed.
- Tax Implications: The self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. Half of the self-employment tax is deductible on the owner’s personal income tax return.
- What It Is: Small business owners may need to make quarterly estimated tax payments if they expect to owe $1,000 or more in taxes when they file their return.
- Who It Applies To: Business owners with income not subject to withholding (e.g., self-employment income, rental income).
- Tax Implications: Failure to pay estimated taxes can result in penalties. Estimated payments cover income tax, self-employment tax, and other applicable taxes.
- What It Is: The QBI deduction allows eligible small business owners to deduct up to 20% of their qualified business income.
- Who It Applies To: Owners of pass-through entities (sole proprietorships, partnerships, LLCs, S corporations).
- Tax Implications: The deduction is subject to income limits and other restrictions, but it can significantly reduce taxable income for small business owners.
- What It Is: Small businesses with employees must withhold federal income tax, Social Security, and Medicare taxes, as well as pay the employer’s share of Social Security and Medicare taxes.
- Who It Applies To: Any small business with employees.
- Tax Implications: Businesses must also pay federal unemployment tax (FUTA) and may need to comply with state and local payroll tax requirements. Offering employee benefits such as health insurance may provide additional tax deductions.
- What It Is: Small businesses can deduct ordinary and necessary expenses related to running their business.
- Who It Applies To: All small businesses.
- Tax Implications: Deductible expenses include rent, utilities, office supplies, marketing, travel, and more. Proper documentation is essential to substantiate deductions and avoid IRS scrutiny.
- What It Is: Small business owners who use part of their home exclusively for business may qualify for the home office deduction.
- Who It Applies To: Sole proprietors, partners, LLC members, and S corporation shareholders who meet the criteria.
- Tax Implications: The deduction can include a portion of mortgage interest, rent, utilities, insurance, and depreciation. There is a simplified option based on square footage, or a detailed method using actual expenses.
- What It Is: The Section 179 deduction allows small businesses to immediately expense the cost of certain qualifying property rather than depreciating it over time.
- Who It Applies To: Small businesses purchasing equipment, machinery, vehicles, or software.
- Tax Implications: The maximum deduction amount is subject to annual limits, and the deduction is reduced if total equipment purchases exceed a certain threshold. It’s a powerful tool for reducing taxable income in the year of purchase.
- What It Is: Depreciation allows businesses to deduct the cost of tangible assets over their useful life. Bonus depreciation allows for an immediate deduction of a large percentage of the asset's cost in the year it is placed in service.
- Who It Applies To: Small businesses with significant capital investments.
- Tax Implications: Bonus depreciation currently allows 100% expensing for qualified property but is scheduled to phase out gradually unless extended by legislation.
- What It Is: Small businesses can deduct expenses related to the business use of vehicles, either by using the standard mileage rate or actual expenses.
- Who It Applies To: Businesses with vehicles used for business purposes.
- Tax Implications: Proper records must be kept to differentiate between business and personal use. The Section 179 deduction may also apply to vehicles.
- What It Is: Small businesses that sell products must account for inventory costs, which include the costs of goods sold (COGS).
- Who It Applies To: Retailers, wholesalers, and manufacturers.
- Tax Implications: The chosen inventory accounting method (FIFO, LIFO, or specific identification) affects taxable income and should align with the business’s financial strategy.
- What It Is: In addition to federal taxes, small businesses must comply with state and local tax regulations, which may include income tax, sales tax, and property tax.
- Who It Applies To: All small businesses operating in states with income, sales, or other applicable taxes.
- Tax Implications: Compliance with varying state and local tax laws is crucial, especially for businesses operating in multiple jurisdictions.
- What It Is: Small businesses selling goods or taxable services must collect and remit sales tax to the appropriate state or local tax authority.
- Who It Applies To: Retailers, service providers, and online sellers.
- Tax Implications: Failure to properly collect and remit sales tax can result in significant penalties and interest. Businesses must stay informed about the sales tax rates and rules in each jurisdiction where they sell.
- What It Is: Small businesses engaged in developing new products or processes may qualify for R&D tax credits.
- Who It Applies To: Businesses investing in innovation and development activities.
- Tax Implications: The R&D tax credit can reduce federal income tax liability, but proper documentation of qualified activities is essential.
- What It Is: New small businesses can deduct up to $5,000 in startup costs and $5,000 in organizational expenses in the first year, with the remainder amortized over 15 years.
- Who It Applies To: Entrepreneurs and new small business owners.
- Tax Implications: This deduction helps reduce the financial burden in the early stages of business development, but costs exceeding the limits must be amortized.
- What It Is: Self-employed individuals, including sole proprietors and partners, can deduct the cost of health insurance premiums for themselves and their families.
- Who It Applies To: Self-employed individuals without access to employer-sponsored health insurance.
- Tax Implications: The deduction reduces taxable income, but it cannot exceed the earned income from the business.
- What It Is: Various federal and state tax credits are available to small businesses that hire employees from targeted groups, such as veterans or long-term unemployed individuals.
- Who It Applies To: Small businesses that hire eligible employees.
- Tax Implications: Credits like the Work Opportunity Tax Credit (WOTC) can reduce federal income tax liability, incentivizing the hiring of certain employee groups.
- What It Is: Small businesses must maintain accurate and detailed records to substantiate income, expenses, deductions, and credits.
- Who It Applies To: All small businesses.
- Tax Implications: Proper record-keeping is essential for tax compliance and audit protection. It includes maintaining receipts, invoices, bank statements, and other documentation.
- What It Is: Small businesses with a net operating loss (NOL) can carry forward the loss to future tax years to offset taxable income.
State Tax Implications for Texas
Texas State Franchise Tax
If you are an LLC registered in Texas you will need to file a franchise tax return for years 2023 and prior.
New Filing Requirements for 2024
The no tax due threshold is increased to $2.47 million and certain filing requirements are eliminated.
Taxpayers Under the No Tax Due Threshold
For reports originally due on or after Jan. 1, 2024, a taxable entity whose annualize total revenue is less than or equal to $2.47 million is not longer required to file a No Tax Due Report. However, the entity is still required to file the Public Information Report or Ownership Information Report.
Specific to Nonprofits you can apply for exemption status and not have to file annually. We can help with that.
REINSTATING OR TERMINATING A BUSINESS
Both Texas-formed and out of state entities registered with the Texas Secretary of State (SOS) must satisfy all state tax filing requirements before they can reinstate, terminate, merge or convert a business. Note the filing due dates to avoid late penalties.
We can help with all of this.
If you are an LLC registered in Texas you will need to file a franchise tax return for years 2023 and prior.
New Filing Requirements for 2024
The no tax due threshold is increased to $2.47 million and certain filing requirements are eliminated.
Taxpayers Under the No Tax Due Threshold
For reports originally due on or after Jan. 1, 2024, a taxable entity whose annualize total revenue is less than or equal to $2.47 million is not longer required to file a No Tax Due Report. However, the entity is still required to file the Public Information Report or Ownership Information Report.
Specific to Nonprofits you can apply for exemption status and not have to file annually. We can help with that.
REINSTATING OR TERMINATING A BUSINESS
Both Texas-formed and out of state entities registered with the Texas Secretary of State (SOS) must satisfy all state tax filing requirements before they can reinstate, terminate, merge or convert a business. Note the filing due dates to avoid late penalties.
We can help with all of this.
Get started on your required Beneficial Ownership Information Report
(BOI Report to FinCEN)
As part of the Corporate Transparency Act, a new federal mandate requires that businesses file a Beneficial Ownership Information Report to avoid criminal and civil penalties. We can help you to file in a compliant and stress-free way. Most reporting fees are 100.00.
Why do you need to file?
In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. This law creates a new beneficial ownership information (BOI) reporting requirement as part of the US government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
Who needs to file?
All domestic and foreign entities that have filed formation or registration documents with a US state, unless they meet one of 23 enumerated exceptions, including:
EXEMPT: Large operating entities that meet all the following criteria:
When to file?
(BOI Report to FinCEN)
As part of the Corporate Transparency Act, a new federal mandate requires that businesses file a Beneficial Ownership Information Report to avoid criminal and civil penalties. We can help you to file in a compliant and stress-free way. Most reporting fees are 100.00.
Why do you need to file?
In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. This law creates a new beneficial ownership information (BOI) reporting requirement as part of the US government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
Who needs to file?
All domestic and foreign entities that have filed formation or registration documents with a US state, unless they meet one of 23 enumerated exceptions, including:
EXEMPT: Large operating entities that meet all the following criteria:
- Employee more than 20 people in the US
- Had gross revenue (or sales) over $5 million on the prior year’s tax return
- Has a physical office in the US
When to file?
- A company registered business before January 1, 2024 has until January 1, 2025 to file its initial BOI Report.
- A company created or registered in 2024 will have 90 calendar days to file after registration is effective.
- A company created or registered on or after January 1, 2025, will have 30 calendar days after registration is effective.
- Civil penalties are up to $500 per day that a violation continues.
- Criminal penalties include a $10,000 fine and /or up to two years of imprisonment.