Basics of Business Taxes
Business taxes. They come in many shapes and forms. From taxes on assets to a tax on sales transactions, they a part of doing business that you cannot avoid. Some taxes are easily identified and passed on. Taxes on a sales transaction are a good example of this. On the other hand, a tax on business assets is something that most likely is passed on to your client, adding a calculation of your overhead expenses.
No matter what the situation, business taxes exist. Taxes cannot be ignored. As a business owner, you must understand what your tax liabilities are, and how to account for and pay them.
Take a simple example. You have decided to start a business manufacturing and selling widgets. You are working with a qualified accountant to create the record keeping system that will become the financial backbone of your company. Your accountant will include tracking and reporting on business tax payments as an important part of your record keeping.
It’s important that you understand the tax consequences of your financial decisions and know what requirements have to be met. Taxes on a business’s financial activity are generally collected on a city or county level, a state level, and a federal level. It is possible that there may be smaller taxing bodies at a city or county level. A transit district or a business development district are examples of this.
If you provide taxable goods and services across state lines, you must be aware of the tax consequences. This can become tedious and time-consuming. Your accountant or financial advisor can advise you on required accounts and records necessary for each taxing body. It will be to your advantage to have a system of tracking and filing taxes. This information about your business taxes will be useful in making decisions regarding your operations.
While having the necessary accounts set up is important, it is even more important that you use the accounts properly. For example, when a customer pays an invoice and there are taxes included in it, you should deposit the tax amount in its proper account. It should not be comingled with revenue from sales of goods and services. If these amounts are kept separate, the money due for taxes will be identifiable and available.
Your accountant will be able to set up a schedule of deposit into tax accounts for you and provide you with information on taxes due and their timing. Quite frankly, you do not want to be in a financial “corner” because you have not filed your business taxes. Being current on your tax payments will avoid interest and penalties.
Being delinquent on your taxes could result in a loss of refund and adversely affect your business’s ability to borrow money. Even more importantly, delinquency on your taxes could result in your business and business assets being seized by the IRS. If there is a possibility that your business cannot meet its financial obligations in terms of taxes, your accountant can help you look for solutions that include installment agreements and offers in compromise. These financial solutions are designed to help a business meet its tax liability while remaining in business.
It is important for your business to file business taxes on a timely and accurate basis. You can see where business taxes can be complicated and time-consuming. There is an almost endless list of forms to fill out and payments to be made. As a business owner, you are responsible. If you have business partners, they share in that responsibility. You must file business taxes properly to profitably manage your business. Tax information must be generated that is reliable and usable.
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The best option for a business owner is to understand their own tax situation. Finding an accountant who is accurate and reliable and who can explain requirements and optional plans of action, is important. The ability of a business owner to ask questions and understand the answer and the consequences of a course of action is important.
One of the greatest challenges in managing a business, especially a young or growing entity, is to make sure that amounts set aside to pay taxes are not used for day to day expenses. Working with your accountant or financial adviser will help you to understand the cash flow of the business and what taxes are due. You will have a clear idea of what records have to be kept along with the schedule of required tax deposits.
Business taxes cannot be avoided or ignored. Businesses can be managed to minimize taxes; however, you cannot simply avoid taxes. To do so is simply to risk your business. The IRS and similar agencies are not to be dismissed lightly. If you do not file on time, you can be subject to interest and penalties for back taxes due. It is also possible that you could lose any refunds due, have a negative impact on social security benefits for yourself, personal income taxes could also be affected if required social security and state and federal income tax deposits have not been made. You could face higher costs of financing or even loss of financing. It is also possible that either the federal or the state revenue services may literally padlock your doors until the question of overdue taxes is resolved.
What if you have an ongoing business with a cash flow that just doesn’t match due dates and deposit requirements? Again, it will benefit you to work with your accountant as soon as there is a question about the ability to file business taxes on or before the deadlines. Depending upon the specifics of the situation and the requirements of the taxing body, your accountant or financial advisor can work with you in working with taxing entities.
Often, it is possible to negotiate an installment agreement that is workable for your business and that satisfies the taxing authority. Another option is a negotiate offer in compromise. or what is referred to as an offer in compromise. An offer in compromise is generally a negotiated payment that covers any outstanding balance for a lesser amount. Having a qualified accountant and financial advisor on hand is generally the best way to handle these requests and negotiations.
For the business owner, it is important to understand what taxes are due, when to file business taxes and how to manage the business cash flow to make sure these obligations are met. The owner should research the tax code or, alternatively, retain a qualified accountant or financial or tax advisor to provide that information.
Business taxes are inevitable. They must be paid. The responsibility of the owner or owners is to understand the process and meet their legal tax obligations.