As a small business owner, you may assume the IRS isn’t concerned with your tax liability. However, this assumption couldn’t be further from the truth. In fact, reports suggest that the IRS has increasingly targeted small businesses for audits in recent years.
While the government may not be interested in your business before it turns a profit, it’s important to pay attention to your tax responsibilities in the early stages of formation in order to maximize deductions and prevent liability issues moving forward. Here are five things every new small business should know about federal income taxes.
1. Your Legal Entity Affects Your Tax BurdenThink that all small businesses endure the same tax burden? On the contrary, the legal entity you elect to form can have a tremendous effect on your tax liability throughout the years.
From sole proprietorships and LLCs, to S corporations and partnerships, there are various business types, each with its own benefits and limitations. For example, S corporations offer small business owners the advantage of paying taxes at the shareholder level, rather than being subject to higher corporate rates. However, a company of this kind must be limited to 100 shareholders and feature a single stock class. On the other hand, while C corporations can deduct a wider range of expenses and include hundreds of shareholders, these groups must contend with double taxation.
Do your research to determine what legal entity best suits your needs.
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