When it comes to taxes, business owners often have many questions, including, “What is tax liability?” Simply put, tax liability is any money due to the U.S. Internal Revenue Service (IRS), state tax collection agency, or local tax agency by the deadline of each tax year.

Taxpayers, individuals, and businesses alike often try to find legal ways to reduce their tax liability by exploring deductions and credits. In addition to attempting to reduce tax liability, businesses can also defer tax liability. Let’s take a closer look at the types of business tax liability and steps you can take to potentially reduce your tax liability by using these tax preparation tips. We’ll also look at the specifics of deferred liability and other relevant tax-related factors.

Types of Business Tax Liability

To do business, companies must deal with tax liabilities. Tax liability comes in different forms. This is money your company will owe to governing tax collection agencies, and the type and rate of tax liability will depend upon your business’s legal structure.

Correctly calculating the right liabilities to pay the IRS, state, and local tax agencies is essential. Here are common liabilities businesses are responsible for paying for in a timely fashion.

Income taxes

This is one of the tax liabilities that will vary depending on your company’s legal business structure. “Pass-through entities” are business structures linked to the person(s) who owns them. The business itself isn’t subject to tax.

Entities such as Pass-through LLCs are taxed at individual income tax rates and are integrated with the business owner’s personal tax return. Legal business structures in this category include sole proprietorships, partnerships, S-corps, and LLCs (these work a little differently). Federal income tax is pay-as-you-go, and owners pay quarterly estimates based on what they expect to earn. C-corporations are subject to double taxation as they aren’t a pass-through entity.

This way of paying income tax liability is beneficial because it avoids double taxation for owners, and in the event the business suffers a net operating loss, the owner can reduce their personal tax liability.

Employment taxes

Often referred to as “payroll taxes,” if you own a business that has employees working for you, you must withhold a percentage of your employees’ wages to cover their income tax obligations:

● Federal and state tax withholding

● Their portion of Social Security and Medicare (FICA)

● Federal unemployment (FUTA) tax

Your company must also pay its share of FICA, along with federal and state unemployment taxes. If you’re self-employed, you’ll pay both shares of FICA from your business’ net earnings.

Self-employment taxes

Self-employed business owners are required to pay self-employment tax. This tax covers Social Security and Medicare tax for those who do not work for someone else and these payments are contributed to your coverage in the Social Security system, providing retirement benefits, disability benefits, Medicare, and survivor benefits. Half of the self-employment tax you pay is a deductible expense.

Sales taxes

A sales tax liability will depend upon the state where the business sells taxable goods and services. If your state collects sales tax, you are required to collect it from your customers on each transaction and then remit the tax to your state tax collection agency. If you neglect to follow through on this task, you’ll be penalized by your state.

As of April 2024, only five states do not collect state sales tax—Alaska, Delaware, Montana, New Hampshire, and Oregon—but there are other tax obligations as a business owner you need to be aware of if you operate within these states.

Property tax

If your company owns any property, it is subject to a tax liability referred to as property tax. Property tax is usually calculated by taking the value of the property and multiplying it by the percentage of the tax rate for taxation jurisdictions. There is no one-size-fits-all way this is handled, and you should refer to your state and local jurisdictions or speak with a professional tax specialist.

Excise taxes

An excise tax is imposed on certain types of businesses, depending upon their operations and what they sell. Excise taxes usually apply to the following:

● Use of highways by trucks

● Selling “sin” goods, such as tobacco, vaping, e-cigarettes, and alcohol

● Transporting air and cruise ship passengers

● Fuel and gas

● Communications and air transportation taxes

● Tax on first retail sale of heavy trucks, trailers, and tractors

● Gambling and sports betting

This is, by far, not an extensive list of excise taxes. Be sure to fully understand what an excise tax is and to also look at the criteria for IRS Forms 720, 730, Form 2290, and Form 11-C to see if your business qualifies.

Reducing Tax Liability

While no business owner is thrilled by the idea of dealing with tax liabilities, there is an upside to the process that comes in the way of reducing your liability.

By keeping organized records and expenditures, you know exactly what you can claim, making the process much easier since you don’t have to go hunting for your documentation (or miss out on valuable opportunities to reduce tax liability if you don’t remember or have the correct records). Being organized also gives you more time to focus on your company’s operations and other more productive areas of running a business.

You can also look for deductions, exemptions, and credits to help reduce your tax liability. Businesses can reduce their tax liability by “writing off” part or all of certain expenses incurred by the company. This includes but is not limited to:

● Advertising and marketing

● Business insurance

● Depreciation

● Business travel and meals

● Home office expenses

● Rent

● Salaries and benefits

● Utilities

● Many others

Other things to look into include contributions to retirement accounts, making investments in your business, payroll exemptions, and charitable donations – all of which can potentially help offset the taxes you’ll owe. Carefully look into your options and seek the help of a tax professional to make sure you take advantage of all legitimate ways to decrease your tax liability.

Additionally, be sure to always file and pay your taxes on time. This way, you will avoid fines and penalties related to filing late.

Understanding Deferred Tax Liability

Deferred tax liabilities are those listed on your business’s balance sheet that show taxes owed but not due to be immediately paid until a future date.

● Deferred tax status means you’ll have to pay the amount due in the future

● To obtain this amount, you multiply your business’ anticipated tax rate and the difference between your taxable income and accounting earnings (before taxes)

● Examples of deferred tax liability are:

○ Selling a product to a customer on credit, but money owed will be paid off in the future through scheduled equal payments

○ Depreciating fixed assets

Basically, deferred tax liability is recognizing that your company owes taxes, but they are not yet due. This is another tax area where you might want to consult with a tax professional who can guide you through how to properly apply deferred taxes or help calculate any specific tax liability formula relevant to your company’s situation.

Obtain your Employer Identification Number (EIN)

Most businesses are required to have an EIN (often referred to as a “tax ID”), but certain individuals who operate their companies without employees or are independent contractors (technically a business) do not need one. However, it is to their benefit to obtain one.

By applying for and receiving an EIN, it’s easier to organize your business taxes from your personal tax return. Here are the steps involved with obtaining your EIN.

● Gather together all required information, including your legal business name, your DBA designation (if applicable), business address, phone number, and the date you began doing business

● Select the reason why you are applying for an EIN

● Name the person responsible for your business (most likely it’s you), along with your SSN or ITIN

● List your business structure (e.g., sole proprietor, LLC, etc.) and its tax structure

● Note the number of employees you have or an estimation of how many you plan to hire

● Review all information you’ve entered to ensure it’s correct, and submit your application

● Submit your application

Once you obtain your EIN, you can hire employees, simplify the filing of business taxes, open business bank accounts, and gain access to more favorable business loan opportunities, to name a few advantages.

Conclusion

Tax liabilities are not money you can avoid paying, but there are legal approaches your business can take to either a) decrease its tax obligations or b) pay the taxes at a later date. Both options provide you with an opportunity to plan for your payments and reduce the chances of running short on funds come tax deadlines.

Businesses that do not accurately estimate their tax liabilities during the year will eventually run into issues. Always be sure to know what your tax liabilities are, how much you’re expected to pay, and the deadlines associated with your taxes. This way, you’ll never be surprised at your tax bill and easily avoid costly penalties.

Filing taxes is one of the more cumbersome tasks associated with running a business. While not likely to be at the top of the list of any business owner’s favorite tasks, it is a necessary one to do.

U.S. tax codes are not the easiest to understand, yet business owners need to be careful not to make mistakes. Ignorance or confusion about tax laws is not an excuse accepted by the IRS and state/local tax collection agencies. It’s important to file correctly in accordance with tax laws or else face potentially costly penalties, even if your mistake was accidental.

In this post, we’ll take a look at the definition of IRS tax codes and offer tips to help business owners understand how tax codes are used. We’ll also do a deeper dive into specific tax codes to help you have an easier time when filing your company’s tax return.

What are IRS Tax Codes?

As Congress passes tax laws, it is up to the U.S. Internal Revenue Service (IRS) to execute and enforce them. To facilitate this, the federal agency compiles these tax laws into a lengthy and comprehensive document containing all current tax codes.

The phrase “tax codes” can be interpreted in two different ways: 1) a set of laws referred to as “The Internal Revenue Code” (also known as “IRC”) or 2) a specific law contained within the IRC.

Tax codes also dictate the amount of tax money due, along with outlining any deductions and/or credits both individuals and businesses can enter on their tax returns to reduce their tax liability.

What does the U.S. Treasury have to do with the federal tax code?

Federal tax codes need to be interpreted, and this task is given to the U.S. Treasury Department. What the federal agency does is “officially” interpret the IRS code and give directions to U.S. taxpayers on how to comply with IRC requirements. To further aid taxpayers, the Treasury Department gives explanations of specific tax codes and provides examples of how these laws are used.

Taxpayers can access and search through the Internal Revenue Service’s website (the official .gov website) for information or search through the Title 26 section of the Code of U.S. Regulations website, a resource maintained by the National Archives.

To find what you are looking for, take these steps:

●     Search “Title 26 Internal Revenue” and view the table of contents to see current Treasury regulations

●     Use “Go” to access specific sections of Title 26 to find up-to-date rules for any specific Treasury regulations

●     Enter keywords into “Search” to find what you need (e.g., you can search “deferred taxes”)

Local libraries typically also keep IRS pamphlets on hand to give people access to information about specific tax laws.

Tax code compliance is the law

A business owner must comply with all tax rules. Anyone who does not adhere to IRS, state, or local tax laws will be penalized. By keeping up with IRS rules, which are subject to frequent change, you improve your chances of complying with tax laws and, as a result, avoiding costly fines and penalties. Additionally, staying compliant with IRC requirements lowers the chances of being tagged for an IRS audit.

Interpreting IRS Tax Code

Many people ask themselves, “What are tax codes?” Taxes aren’t the easiest thing to manage, and they can be overwhelming and confusing. While all business owners are mandated to comply with the IRC, the good news is you do not actually have to read tax codes to abide by them. However, since the process has many complexities, it’s wise to know basic information so you can find what you need when you ne

Explore IRS publications

The IRS puts out numerous publications to provide guidance for taxpayers. These resources are also designed to help people interpret tax codes. The helpful publications that small business owners should know about include:

Your Rights as a Taxpayer (Publication 1)

This is the most basic IRS publication everyone should explore first. Included in Publication 1 is “The Taxpayer Bill of Rights,” which explains your rights and breaks down the processes for examination, appeal, collection, and refunds.

Tax Guide for Small Business (Publication 334)

Publication 334 provides a general overview of federal tax laws for self-employed persons, giving details about income, expenses, and tax credits as they apply to businesses.

Starting a Business and Keeping Records (Publication 583)

This publication reiterates the fact that business owners are responsible for understanding their tax responsibilities when launching a business, along with how to continuously maintain good records while the business is in operation. This pamphlet also provides valuable information about EINs, business structures, and other helpful tips.

Federal Income Tax Withholding Methods (Publication 15-T)

Businesses hiring employees should be familiar with Publication 15-T. This publication outlines how owners can accurately calculate federal income tax withholding from their employees’ paychecks

Understanding Your EIN (Publication 1635)

Obtaining an Employer Identification Number (EIN) is an important step for opening a business. Publication 1635 explains the definition of an EIN, who is eligible to obtain an EIN, situations where an EIN is required, and other important details about EINs.

Small Business Health Care Tax Credit (Publication 4862)

Publication 4862 outlines eligibility guidelines for this tax credit and gives business owners guidance about applying this credit to their tax returns.

Independent Contractor or Employee (Publication 1779)

Business owners who work 100% for themselves through selling services or products usually know they fall into the self-employed category. Other types of small business owners working in different capacities, e.g., freelancers, gig workers, or consultants, may be unsure if they are self-employed, especially if they have to answer to someone else. Those in this “gray” area will find Publication 1779 helpful in determining if they are classified as an employee or independent contractor.

How To Depreciate Property (Publication 946)

Depreciation is a helpful way to defer tax obligations. In Publication 946, the IRS explains to business owners how they can recover costs associated with a business or its income-producing properties. To depreciate property you own, the following rules apply to property:

●     You must own the property

●     Must be used during the course of business or income-producing activity

●     Must have a useful life

●     You expect to use it for more than one year

Retirement Plans for Small Business (Publication 560 – 2023)

Small business owners who are not working for larger companies that provide pensions or have employers contributing to their retirement plans, such as 401(k)s, must do their own planning. Publication 560 outlines the different options small business owners have, including:

●     Simplified employee pension (SEP)

●     Savings incentive match plan for employees (SIMPLE)

●     Qualified plans for self-employed individuals (also referred to as Keogh plans or H.R. 10 plans)

Use tax software

While the IRS will still accept paper tax returns, using software is much more efficient because business owners can access software versions designed specifically for businesses. This helps them identify deductions, credits, and other important tax rules businesses are required to follow.

Work with a tax professional

It’s common for small business owners to find it incredibly time-consuming to organize and complete taxes, even if they use tax software. Alternatively, many find it beneficial to work with a professional tax specialist. Tax experts are current on ever-changing tax laws and can help determine which ones apply to your company.

Obtain Your Employer Identification Number (EIN)

Many small business owners are required by law to obtain their employer identification number before they open for business, but not all. Even if not required, business owners should explore getting one.

Advantages of obtaining an EIN

●     Current or future ability to hire employees without delays

●     Get access to favorable business loan opportunities

●     Avoid the need to include a Social Security number on business documents

●     Easier to file business tax returns

●     Ability to open business bank accounts

●     Gain a more professional look since EINs replace Social Security numbers

Steps to applying for an EIN

●     Assemble all required documentation, including your legal business name, “doing business as” (DBA) designation, business phone number and address, and the date the business opened

●     Include the name of the person responsible for the business, along with their SSN or ITIN (this is most likely going to be yourself)

●     List your company’s entity type (“business structure”) and tax structure

●     Share the number of employees you currently employ or provide an estimate of how many you plan to hire

●     Select the reason why you’re applying for an EIN

●     Answer any tax-related questions presented to you in the application

●     Review your application to ensure all questions are answered correctly and in full

●     Submit your application and wait to receive your EIN

Conclusion

While you don’t need to memorize the IRS tax codes for business, it’s a good idea to become familiar with common rules that apply to businesses and to learn how to find guidance when you need it. Places to find help include:

●     Government publications

●     Searching the official IRS, Treasury, and National Archives websites

●     Reaching out to a tax professional

Knowing where to find help makes it easier to interpret tax laws when you need answers.

Taxes aren’t the most fun part of running a company, but they are a reality. Learning how to access the tax information you need can help set you up for success.

As April 15 rolls around each year, many people across the U.S. begin to fret. Filing taxes is a stressful time of year, but avoiding common tax mistakes can help offset stress and fears of doing it wrong.

Filing income taxes involves many complexities, but you still need to get it right. The IRS doesn’t accept misunderstanding tax laws as an excuse. In some cases, errors can lead to you overpaying as well.

To sidestep tax filing mistakes, it’s a good idea to take the time to learn about taxes and how to file a tax return free of errors so you don’t end up underpaying or overpaying your taxes.

Common Tax Mistakes to Avoid During Filing

To help prevent tax errors, the best place to start is to understand the biggest tax mistakes business owners tend to make. The first step is to determine if you will be filing your small business taxes with your individual tax return or if it should be separate.

Tip: Most small business owners will file income and business taxes at the same time.

The following are the most common tax mistakes to avoid during filing.

Listing incorrect filing statuses

It’s essential for all taxpayers to correctly determine their filing status because this information is used to let the IRS know how it will apply tax. Keep in mind that businesses are also taxable entities, even if they’re filed separately.

Individual tax returns will select either single, married filing jointly, married filing separately, head of household, and qualifying widow or widower with dependent child. Some business structures are required to file with their own status which is completely separate from the business owner’s individual tax return.

Corporations must be taxed as “C-Corp” or “S-Corp,” while LLCs can be taxed as “disregarded.” It can be helpful to speak with a tax specialist because there are advantages and disadvantages associated with different statuses.

Filing taxes too early

To get the task off their proverbial plate, some business owners opt to file their taxes as soon as possible. Filing too quickly can be a mistake because this sometimes leads to missing key information on the tax return or neglecting to include important tax documents. The IRS may delay processing if a return is filed with missing information.

Entering incorrect Social Security numbers

After entering a Social Security number on a tax return, be sure to double-check it to make sure there are no numbers transposed or mixed up. Mistakes can lead to serious issues with the IRS because of having a typo in a tax identifier. Always make sure Social Security numbers are entered exactly as they appear on the official card.

Underestimating taxes owed

Employees have taxes withheld from each paycheck, but since businesses don’t collect taxes for themselves this way, they must pay their tax obligations throughout the year. This typically happens every quarter.

While it can be difficult to pinpoint an exact amount to pay, the IRS expects businesses to make suitable estimates. If a company is found to intentionally underestimate what they owe, the IRS may impose penalties.

Underreporting income

It is the law to report all taxable income—so not unlike individuals, businesses are also expected by the IRS to accurately report what they’ve earned over the year. If the federal agency finds a company has intentionally underreported or accidentally underreported income, then it may impose penalties which can be costly. It’s worth the effort to double-check the math when calculating income to report to the IRS.

Incorrect/inaccurate banking information

Correctly entering bank information is essential when submitting a tax return because once you send it either via mail or electronically, it cannot be edited or changed.

In the event your company owes taxes, the IRS won’t be able to collect tax if it can’t withdraw due to a wrong account number being entered (if you choose to pay electronically). If your business is due a refund, the bank won’t accept the money, and you’ll have to wait to receive a check.

This is a simple issue to avoid by double-checking account information. However, it is a common tax mistake that is often made.

Over-reporting business expenses

The IRS legally permits businesses to deduct certain business expenses to reduce tax obligations. However, if a company is found to be over-reporting or inventing business expenses to decrease the amount owed to the federal tax agency, there will likely be an audit, along with potential penalties imposed.

What Happens If You Make Tax Filing Mistakes

Making mistakes on a tax return can bring additional layers of stress because the government requires you to file accurately. If you make errors on your return, you’ll have to try to rectify them or even maybe face an audit. Making mistakes on tax returns usually ends up triggering one of the following scenarios to fix the problem.

Filing an amended tax return

The good news is your business can legally amend its return to correct errors, even if the taxes have already been submitted.

● Sole proprietors and single-member LLCs should use Form 1040X (Amended U.S. Individual Income Tax Return)

●     Corporations should file Form 1120X (Amended U.S. Corporation Income Tax Return)

The requirement for amendments is to file corrections within three years of the original tax deadline.

Getting an IRS audit

If the IRS feels a tax return looks suspicious or incorrect, they may call for an audit to be done. Most of the time, audits are not random, they are generally chosen. This is a good reason to be careful not to make any of the common tax filing mistakes. Audits are done either by mail, at an IRS office, or at your place of business. Audits are lengthy and can create stress for business owners.

Paying penalties

Another scenario stemming from mistakes on tax returns is the IRS issuing a penalty, which is usually a monetary fine. Once you pay, this typically resolves the situation. It’s important to remember that if you owe the federal agency money, you’ll have to pay interest since this will be viewed as late filing.

If you run into problematic issues with your company’s tax return, it’s a good idea to discuss your situation with an accountant, tax attorney, or another tax specialist. This way, you can be certain you’re getting the best solution for your tax issue.

How to Avoid Making Any Mistakes On Your Taxes

Making mistakes is a realistic possibility every taxpayer face, but you can be proactive and take steps to avoid potential errors and submit an accurate tax return.

● File your return electronically.

● Utilize tax software to check math calculations (paper tax returns are at higher risk for errors since it’s done by hand).

● Organize write-offs by saving receipts, documents, and any other information you need to file an error-free return.

●     Carefully proofread and double-check each segment of your tax return before submitting.

Many business owners choose to work with a tax professional to ensure they always file correctly. Tax experts are up-to-date with current laws (which are always subject to change) and know the best ways to file correctly.

One question you might have is, “Are accountants liable for tax mistakes?” The answer is no. The bottom line is the taxpayer is always responsible for their business’s tax return. Research before hiring a tax expert so you know you have a reputable and experienced individual doing your taxes.

Properly Obtain Your EIN

Any business with employees working for them must first obtain an Employer Identification Number (EIN), which is often referred to as a “tax ID.” Even small companies operating without employees can benefit from applying for an EIN. To obtain one, you’ll need to provide the following information.

● Gather information about your company including

○ Legal name

○ Business address

○ Phone number

○ DBA designation (“doing business as”)

○ Business structure (e.g., LLC, sole proprietorship, partnership, S-Corp)

● List the individual responsible for the company, along with their tax ID (usually a Social Security number but might be an Individual Tax Identification Number)

● Select the reason why the business requires an EIN

● Provide the number of employees working for you, or, if you plan to hire employees, give an estimate of how many you will bring onboard

● Make sure you’ve answered all questions in full

●     Review and proofread your EIN application

Lastly, submit your application and wait for a response. Once you have your tax ID number, it will open up other opportunities for your business.

Conclusion

When annual tax time arrives, many business owners struggle. One of the best ways to reduce stress is to stay on top of organizing tax records. Plan for taxes every month by saving receipts, organizing records, and any other proactive steps that apply to your type of business and its taxes. Come next tax season, the process will be far easier.

Filing business taxes and individual taxes can become complex with so many tax rules, credits, deductions, and other details involved.

An essential detail to understand when filing taxes is knowing when and who you can claim as a dependent. While you must be careful to follow all relevant tax laws, dependents are a great way to reduce your tax obligation.

In this article, we’ll examine which individuals in your household qualify as a dependent under IRS rules, the advantages of claiming dependents on your tax return, and other applicable factors related to claiming dependents for tax purposes.

We’ll also take a look at why you want to consider applying for an employer identification number (EIN) for your business sooner rather than later.

Let’s jump into the specifics regarding dependents and how to claim them on your tax return.

What is a Dependent?

The IRS defines a dependent as a child or other qualifying relative who lives in your home and is financially supported by you. You cannot claim yourself or your spouse as a dependent on your tax return. The IRS applies the following rules to claiming dependents.

●     Dependents can’t claim anyone else as a dependent on their own tax return

●     Dependent must possess a valid Social Security number or other qualifying taxpayer ID number

●     Dependent must be one of the following:

○     U.S. citizen

○     Resident alien

○     National

○     A resident of Canada or Mexico

●     Individuals can only be claimed as dependents on one tax return per year (some parents alternate years if they both support their children or the parent who the child lived with most of the time claims them)

●     Dependents must receive more than half their monetary support from the individual who is claiming them on their tax return

Generally speaking, to claim a dependent, the individual must have resided in your home for more than half of the tax year.

Benefits of Claiming Dependents on a Tax Return

Taxpayers who are eligible to claim qualifying dependents on their tax returns get several financial advantages. These benefits range from overall cost savings to specific tax deductions, credits, and other benefits.

Frequently claimed dependent tax credits

IRS code allows for numerous tax credits, but when it comes to claiming dependents, there are several common credits allowed by law. These include the Child Tax Credit, Adoption Tax Credit, Child and Dependent Care Credit, Earned Income Tax Credit, and American Opportunity Tax Credit. If a dependent qualifies for one or more of these credits, this can reduce how much tax you owe on a dollar-for-dollar basis. In some cases, this significantly reduces your tax obligation and when coupled with other tax credits, you can substantially reduce your tax bill.

Common tax deductions

Tax deductions are slightly different from tax credits, but their usefulness is the fact they reduce total taxable income. This means you’ll owe fewer tax dollars. If you have qualifying dependent(s), you can claim their medical expenses, dental expenses, student loan interest, and other eligible educational expenses. Pair this with all other non-dependent related eligible deductions and credits that offer families tax breaks, and you can owe less money to the IRS.

Head of household status

This isn’t a deduction or credit, but if you qualify, you can owe less in taxes to the federal government when tax time comes around.

To claim head of household, you must have a qualifying dependent, have been unmarried on the last day of the tax year you’re filing for, and pay for more than half the cost of maintaining your household during the tax year.

The IRS does have one exception. If you support a parent you can claim as a dependent, they do not have to live in your home for you to be eligible to claim head of household status.

Important Things to Know About Dependents

Individuals eligible to be claimed as dependents include child(ren), stepchild(ren), siblings, half-siblings, and parents. Domestic partners can occasionally be eligible to be claimed as dependents if they can’t support themselves.

Eligibility rules are as follows:

●     Children under the age of 19 or, if older, up to 24 if a full-time student

●     Individuals who are permanently and totally disabled can be of any age

●     Rules may differ, depending on specific situations

The IRS uses qualifying factors for all types of dependents.

How qualifying children are determined by the IRS

The IRS sets five tests to help taxpayers determine whether they have a qualifying child.

Relationship test: The child you’re claiming must be your child, stepchild, foster child, sibling, or step-sibling (or a descendant of these family members).

Residency test: Your dependent must share your primary residence with you for at least six months of the tax year you plan to claim them. (Some exceptions may apply; check with the IRS or a tax professional to see if you meet the qualifications).

Age test: Your dependent must be a) under 19 years old at the end of the tax year, b) a full-time student age 24 or younger, and c) any age if your family member has a permanent or total disability.

Support test: You must spend more than half of the money used to support your dependent (e.g., if they are paying for 60% of their own support, they would not qualify).

Joint return: The dependent cannot file a joint return for the tax year they are being claimed as a dependent. The IRS does allow for it under the circumstances that the dependent is only filing, so they can claim estimated taxes they already paid or claim a refund of income tax withheld.

Determining if you have a qualifying relative (not your child)

The IRS has four tests to help taxpayers determine if they have family members whom they can claim as dependents on their tax returns.

Not a qualifying child test: If the dependent is listed on another taxpayer’s return as their qualifying child, you cannot claim them.

Support test: You must provide more than half of the support for the adult dependent you’re claiming on your tax return.

Member of household/relationship test: The dependent must reside in your home all year as a household member. Qualifying adult relatives include parents, stepparents, grandparents, and other direct ancestors (uncles, aunts, nephews, nieces, and in-laws (parents, siblings). Foster parents do not qualify to pass this IRS test.

Gross income test: You cannot claim a family member as a dependent if they make more than $5,500 (current amount for 2024, but this will change year-to-year). An exception is if your dependent has a disability and earns wages from a sheltered workshop. In this case, income would be excluded.

Apply for EIN for Business Taxes

Corporations file their own tax returns, but most small business owners typically file their individual and business tax returns together. Any business owner who hires employees must have an employer identification number (EIN). However, even those who don’t need an EIN find having one to be advantageous.

Benefits of having an EIN

Aside from gaining the ability to legally hire employees, benefits include the ability to open a business bank account, gain access to favorable business loan terms, apply for specific permits and licenses, and simplify the tax filing process.

How to obtain an EIN

You need to include your SSN when filing your individual tax return, but you can use your EIN for the business portion of your tax return. To obtain an EIN, you’ll need to do the following.

●     Assemble required information, including your company’s legal name, date the business was opened or acquired, business address, phone number, business entity structure (e.g., sole proprietorship or LLC), and DBA designation (“doing business as”) if applicable.

●     Include the name of the person responsible for the business and their taxpayer ID (either an SSN or an ITIN).

●     Select the reason why you need to obtain an EIN.

●     List the number of employees you currently have working or an approximation of how many you plan to hire).

●     Proofread your application, ensure all questions are answered, and check for accuracy.

●     Submit your EIN application and wait to receive your number.

Once you obtain an EIN, you’ll quickly see the advantages you’ll gain because, even if you don’t need it now, you’ll be prepared for the future if you need to take out a business loan, hire employees, or open a business bank account. This way, you avoid delays that could negatively impact your operations.

Conclusion

The ability to claim dependents on a tax return can significantly reduce the amount of taxes you owe, which means you have more money to invest in your company or use for other purposes. However, you want to be accurate and ensure your dependents meet the IRS eligibility rules. If you claim a dependent who you shouldn’t claim, you could face severe consequences, including but not limited to expensive fines and penalties. You also could trigger an audit, which opens up another host of problems.

Understanding tax rules regarding dependents can be confusing. To simplify the process, you may want to consider working with an accountant, tax attorney, or other tax professional.

Small business owners are busy individuals! As they typically need to swap out many hats during an average workday, thinking about longer-term tasks, such as their personal and business income taxes and accounting practices, can be difficult. For many small business owners, the two sets of taxes are interlinked.

While April isn’t too far behind us in the rearview mirror, it’s never too early to begin planning for the next tax cycle. It’s a good idea to do IRS tax prep all year long. This way, everything is organized and ready to go when tax season rolls around.

Ready to begin your annual tax prep checklist? Let’s look at top tax tips for individuals you can integrate into your planning.

How to Stay Organized For Taxes Throughout the Year

Routine and consistent organization is the key to correctly filing your individual and business tax returns annually. This way, you won’t have to scour around your home and workplace to find all the necessary receipts for tax filing.

One way to start your organizational system is to make a small business tax preparation checklist.

●     Write a detailed list of all tax-related tasks needing to be completed

●     Ascertain important tax dates throughout the year and put them on your calendar

○     Schedule and pay quarterly taxes before the deadlines

○     Issue W-2 and 1099 forms before the deadline (if you have employees)

○     File IRS Form 941 (if you have employees)

○     Note any other required forms for the IRS and your state tax collection agency

●     Open a separate bank account for business-related income and expenses because this separates business funds from personal money, simplifying the tax reporting process.

●     Utilize expense-tracking apps instead of spreadsheets

○     Organize and save receipts to enter into your app

○     Separate personal and business receipts

○     Keep paper receipts organized in case they are needed

●     Separate paper receipts in different files for different types of deductions

●     Set aside a dedicated block of time each week to work on taxes

Suppose you have a home office dedicated to your business (different from remote work). In that case, you can claim certain home improvement expenses and receive full or partial tax credits or deductions, depending upon the expense. Be sure to carefully organize these receipts and make them a part of your tax prep checklist.

Tip: Home improvement expenses must be directly related to your office space or work that benefits your office. (For example, a new kitchen floor or bathroom remodel would not qualify, but if your home gets a new roof or HVAC system, you can partially claim those expenses since these benefit the entire house, including your office.)

The Best Tax Tips for Individuals & Businesses

Filing taxes is typically a cumbersome task, but it must be done. Being prepared all year round will help to cover your bases and make tax filing easier. The following IRS tax prep tips can go a long way toward simplifying and streamlining the process.

Good bookkeeping and record-keeping

Forget stashing receipts and other vital tax paperwork in a shoebox or a desk drawer. This usually never ends well because important tax-related receipts get commingled with other records, lost, or accidentally thrown out. Instead, create strategic bookkeeping and record-keeping systems.

Create a dedicated file system

Some small businesses may prefer paper, but digitized records make it easier to organize, track, secure, and sort information.

Organize your receipts

Create a dedicated place for receipts and receipts only. Categorize them by date and type of expense so you can easily discern which ones will apply to your taxes. Accounting software can help with this task. Additionally, you can scan paper receipts to help reduce clutter and make specific receipts easy to find. Make regular backups of digital files to secure the information on receipts further.

Complete your taxes on time

Plan to complete and submit your tax return before the April deadline. While the IRS does permit extensions, they are costly. You’ll have more time to file, but you’ll still have to pay your taxes by the April deadline. If you’re late, the IRS charges interest and monetary penalties, increasing the amount of money you owe. Plus, if you’re due a refund, that’s less time for the money to be in your hands if you delay filing.

Embrace deductions

Small business owners usually qualify for several deductions, which are often referred to as “write-offs.” Deductions help reduce taxable income, which can help a small business put some money back into its budget.

What are deductions?

Deductions are costs incurred throughout the year necessary to operate a business. Claiming them reduces your taxable income. Through good organization, you’ll have the information to know what deductions you might qualify for to claim on your tax return.

Examples of common deductions

Deductions you can often claim include, but aren’t limited to, the following:

●     Maintenance and repairs

●     Advertising and marketing costs

●     Workplace expenses

●     Workplace utilities

●     Expenses relating to your business or home office

●     Legal and professional fees (e.g., an accountant or attorney)

●     Health insurance for the business owner and employees

●     Employee salaries

●     Business insurance

●     Depreciation on large assets (e.g., office equipment, vehicles, or furniture)

●     Certain business travel expenses

●     Educational seminars and conferences

●     Other relevant expenses

To legally claim deductions on your taxes, careful records are a must. If you’re audited, you need to be able to back up any claims you’ve made. By organizing these expenses year-round, you’ll quickly be able to supply any “proof” required if you’re asked.

File electronically

The IRS and state agencies still permit taxpayers to file paper tax returns, but it’s inefficient. Filing electronically is faster, reduces the chances of errors, and ensures a faster refund if one is due. You can file taxes online, use tax software, or ask your accountant to file electronically.

Choose a reputable tax preparer

You can file your individual and/or business tax returns yourself, but it might be worth considering working with a reputable tax preparer instead. While you’ll pay the accountant or other tax preparer for their time, many small business owners find this expense to create cost savings. Tax laws are constantly changing, and it’s hard to keep current.

Your part of the tax process will be to organize and maintain tax records. Your tax preparer will know what to file, the best deductions and credits you can explore, identify which deductions and credits you qualify for, and any other obscure tax details many business owners often overlook. Working with a professional also helps ensure your tax return is submitted error-free.

Obtain your EIN

Small businesses planning to hire must obtain an Employer Identification Number (EIN) before hiring. Many entrepreneurs work for themselves and don’t have employees, so one isn’t necessary, but obtaining one is still a good idea.

EINs are like Social Security numbers but are tax IDs for businesses. Using them empowers you to enjoy opportunities such as opening business bank accounts, obtaining favorable loan terms, and applying for permits and licenses. Having an EIN also helps to streamline the tax process, especially since you don’t have to give out your SSN to others for tax purposes; simply supply them with your EIN.

To obtain an EIN, you’ll need to supply some information, including your legal business name, DBA designation, business address, phone number, and the date you commenced operation.

Other information you’ll need to supply is the name and Tax ID number of the person responsible for the business (you) and why you’re applying for an EIN. List your business entity type (e.g. LLC, sole proprietor, etc.) and supply the number of employees you have or plan to hire.

Once you’ve assembled and entered all required information, proofread your application and submit it.

Using a Tax Prep Checklist

Assimilating a tax prep checklist into your overall tax planning is easy once you get the hang of it. Here’s what you’ll need.

●     Last year’s tax return

●     SSNs, EINs, or any other tax ID

●     Bank account numbers

●     Financial statements (e.g., balance sheet, cash flow, profit/loss statement, etc.)

●     Wages paid to employees

●     Employee benefit expenses

●     Income records, such as gross receipts, sales records, and other income-related information

●     Cost of goods sold documentation if your company sells products.

○     Inventory value

○     Inventory purchases

○     Materials and supplies

○     Ending inventory dollar amount

○     Any other inventory-related documentation

●     Charitable contributions records

You’ll also need to know the applicable forms to file, which aren’t the same for every business. Examples of forms include: 1099-INT, 1099-K, 1099-NEC, W-2, W-3, 1096, 940, 941, and Schedule K-1, to name a few. If you’re being taxed as a partnership, LLC as an S-Corp, or a corporation, you’ll probably have different forms to file.

Conclusion

Tax season is going to arrive every year like clockwork. It’s predictable, so it’s best not to procrastinate. While it’s an overwhelming process, it doesn’t have to be if you get ahead of the game and do small tasks throughout the year. Staying on top of taxes year-round helps to mitigate potential mistakes and reduces stress. Taking actionable tax preparation tips goes a long way toward easing the process.

Identity theft has grown to be a persistent problem around the world. According to the most recent report published by the U.S. Bureau of Statistics in October 2023, about 24 million individuals became identity theft victims between 2020-21. The losses associated with identity theft totaled a staggering $16.4 billion.

Identity theft occurs in many ways, with tax identity theft increasing yearly. Records indicate over 1 million tax returns were flagged in 2023 by the IRS as being filed by possible identity thieves. Unfortunately, no one is 100% safe from becoming a victim of identity theft, including tax identity theft. Having an Employer Identification Number (EIN) is much safer than using your Social Security number for your business.

While you cannot guarantee it won’t happen, you can take proactive measures to protect yourself from becoming a victim. In this post, we’ll talk about what tax ID is, how tax identity theft occurs, and what steps you can take to decrease the chances of becoming a victim.

What is Tax Identity Theft?

When an individual uses another person’s Social Security number to claim a fraudulent tax refund or file a fraudulent tax return, this is called tax identity theft.

Ways identity thieves steal SSNs

The identity thief finds a way to obtain the victim’s Social Security number and other PII (personally identifiable information) and uses it for illicit gain. Common ways ID thieves get SSNs include:

• Email phishing
• Phone and text phishing
• Buy PII from criminal sources
• Stolen purses and wallets
• Mailbox theft
• Dumpster diving

Scammers may also obtain SSNs and PII by posing as legitimate entities, such as employers, bank representatives, credit card customer service, government agencies, IRS employees, or other authorities.

 How do victims discover they are tax fraud victims?

After the scammers have the information they need, they’ll file a fraudulent tax return using a post office mailbox or a false address, so the victim never receives mail from the IRS. Victims typically don’t initially realize they’ve been victimized until long after the crime was committed.

Here’s how victims typically discover what’s happened.

• Trying to file their own tax return and receive an IRS notice a return was already filed
• Receiving unrequested tax transcripts in the mail
• IRS records indicate the victim earned income from a place where they were never employed
• IRS sends a notice to the taxpayer indicating they opened an online IRS account
• IRS sending a notice an existing account was disabled or accessed, and the taxpayer didn’t take these actions
• Being assigned an Employer Identification Number (EIN) that the individual did not apply for

Preventing Tax Identity Theft

Unfortunately, any form of identity theft is a risk, and it’s difficult to circumvent this crime with any guarantee of your safety. The good news is you can take preventative measures to safeguard your PII and SSN.

• Never carry an SSN card in your purse or wallet (memorize it instead)
• Create strong passwords for online accounts
• Use unique passwords for each website or app used
• Use security software with a firewall
• Always secure internet connections when filing taxes or doing any business online with PII
• File taxes as soon as possible so scammers cannot file first
• Fully shred bank statements, credit card statements, and other documents containing PII
• Consistently watch your credit score
• Check your credit reports regularly
• Use encryption for digital files containing PII
• Use multi-factor authentication when filing taxes electronically
• Be wary of scammers pretending to be IRS agents
• Never share PII or SSN with anyone calling, emailing, or texting (the IRS sends USPS mail to taxpayers)
• Check licenses and certifications before entrusting a tax preparer to file tax returns

Identity thieves are usually persistent and apply high-pressure tactics to get the information they need to defraud people. Always be on guard!

How to Identify a Potential Identity Scammer

Identity thieves are savvy and have many tricks to fool people. Unfortunately, they work hard to stay one step ahead of everyone to successfully – and illicitly – earn money from their scams.

What to look for to indicate ID theft

Identity thieves are very good at what they do, but you can learn how to spot the warning signs with a keen eye. A good place to start is to read up on the warning signs of phishing, which occurs via phone, email, text, social media, or even in person.

Always verify who you’re speaking with, never click unsolicited links in email or text, always use official websites/contact information (e.g. don’t reply to emails or call phone numbers listed in them), and ask for ID if someone comes to your home or workplace.

Remember, identity thieves apply high-pressure tactics when targeting victims they can exploit. They aim to get you to think quickly by invoking fear or urgency so you don’t have time to think about what they’re asking.

Signs identity theft has occurred (can lead to tax fraud)

Potential victims often ask themselves, “How can tax identity theft occur?” In addition to the signs that tax fraud has occurred, if you see other seemingly unrelated red flags, you want to investigate to prevent further damage. The sooner you catch ID theft, the better.

Before committing tax fraud, ID thieves might try to drain your bank account or run up your credit card. Some red flags are:

• New credit cards or loans appearing on your credit report
• Strange transactions appearing on your bank statement
• Hard inquiries show up on your credit report if you didn’t apply for credit
• Credit scores dropping significantly and suddenly
• Unfamiliar credit card challenges appearing (even if they’re low dollar amounts)
• Recurring or singular online bill payments do not go through when funds are sufficient in the bank account
• Unexpected denials of loans and credit card applications
• Phone calls arriving from unfamiliar debt collectors
• Credit card companies send alerts about purchases not made
• Receiving strange medical bills
• Suddenly being locked out of bank and/or other online accounts
• Routine mail going missing, such as credit card bills or bank statements

These unusual activities merit immediate action. Don’t delay because procrastinating could result in thieves running multiple scams against you, ruining your good name, and negatively impacting your financial standing.

What to Do If Someone Files Fraudulent Taxes In Your Name

Discovering you’re a victim of tax fraud is scary, frustrating, and perhaps leaving you unsure of what to do next. This is a set of circumstances you don’t want to delay taking action. It is important to notify the IRS right away. Here are the important steps you should take.

• File an identity theft report with your local police department
• File IRS Form 14039 to alert the federal tax agency that someone is using your SSN to file a fraudulent tax return
• Gather documentation to accompany Form 14039 as requested by the IRS
• Request all three primary credit reporting agencies, Equifax, Experian, and TransUnion, to place an immediate freeze on your credit reports
• Go to the Federal Trade Commission’s (FTC) official website and file an online theft report

Apply for an EIN To Protect Your Personal Identity

It’s a good idea for all businesses to obtain an Employer Identification Number (EIN), even if they are not required by law to have one. While running a business, you’ll most likely work with third parties (like vendors or anyone who pays you) and have to provide them with tax-related information so they can file their proper forms.

Tip: If you have one or more employees working for you, you must obtain an EIN

Keep your SSN private

Without an EIN, you’ll need to provide your Social Security number (SSN) to any applicable third parties instead. Having your SSN stored with other companies puts you at higher risk for identity theft since you lose control of how they secure data, or you might be a victim of a data breach. With an EIN, you can provide this tax ID number instead, preserving the privacy of your SSN.

Necessary information to apply for an EIN

To apply for an Employer Identification Number, you must assemble certain information to enter on the application.

• Your legal business name
• DBA (“doing business as”) designation, if applicable
• Business structure entity type (e.g., sole proprietorship, partnership, LLC, S-Corp, etc.)
• Name of person responsible for the company, along with their SSN or ITIN
• Choose the reason why you are applying for an EIN
• List how many people work for you or how many you anticipate hiring

Once you’ve completed your EIN application, review all questions to make sure you’ve answered, proofread your submission, apply, and wait for a response.

Conclusion

Identity theft is a prevalent societal problem, and as a result, tax ID theft is on the rise. However, you can prevent ID theft by educating yourself on the risks, knowing what steps to take to prevent it, and knowing what to do in the event a thief does obtain your SSN or other PII. Remember, the more quickly you act, the better you can limit the damage.

Most everyone agrees taxes are stressful for all, whether you’re filing taxes as an individual, for a small business, or on behalf of a large corporation. In fact, according to some surveys, 80% of small business owners in the U.S. feel at least “some stress” during tax season, and roughly 63% of them rate their stress level at three or more on a scale of five.

Tax season can be rough, especially for small business owners who may not have the time or resources to rely on others to handle operations so they can attend to other important matters. It’s difficult and stressful to juggle everything. However, the important tasks associated with accounting can’t be avoided.

Learning small business accounting tips and tricks can help. Let’s take a look at some ways small business owners can make tax season less stressful.

Small Business Accounting Tips for Success During Tax Season

Depending on the type of business you run, you may file your business taxes in conjunction with your individual (or joint) tax return, or you may file separately. Either way, the following small business accounting tips can help the process be less overwhelming.

Keep personal and business accounts separate

One mistake you’ll want to avoid is commingling your personal and business bank accounts. While it might feel easier to use one account for both, for accounting and tax purposes, it’s best to separate them.

Reasons to do so include:

● Liability protection (unless you operate as a sole proprietor)

● Ability to build your company’s credit standing

● Simplify and streamline accounting

● Improves recordkeeping abilities

● Enjoy bank account features only offered to businesses

●     Having more accurate books

If you combine your personal and business accounts, you may run into conflicts or other complexities at some point. On the other hand, if you keep them separate, you can easily determine your company’s financial standing, and there is less room for confusion over which funds or debts belong where or when it comes to filing your annual tax return.

Use bookkeeping software

Years ago, small (and even large) businesses relied on old-school accounting ledgers to manage day-to-day transactions regarding business assets, debts, revenue, and other relevant figures.

Today, bookkeeping software easily removes much of the tediousness associated with doing accounting in the days of yesteryear. By embracing a good bookkeeping system, you can simplify your accounting for:

● Managing taxes

● Tracking cash flow

● Tracking accounts payables and receivables

● Generating invoices and payments

● Handling inventory

●     And much more!

Spreadsheets are a step above ledgers, but a full-fledged bookkeeping software application can streamline the important financial data points your company needs easy access to. Not only does software help boost accuracy, but it is also a major time-saver due to its high level of automation.

Automate manual processes

Automation goes hand in hand with bookkeeping software. Instead of relying upon yourself or an employee to tediously collect, record, manage, categorize, and access your accounting and financial information, you can enter your data into a program and completely automate it. This means accurate and updated data allow for better decision-making with the most recent data points available.

Need to pull up a financial report or generate payroll? You can do this with ease and efficiency, along with having the latest data points at your fingertips, increasing accuracy and productivity. You can even set reminders, so you never miss a deadline or other important task.

Think of all the time automation can free up. Instead of toiling for hours over payroll, through automation, these tasks can now be done rapidly. Automation also greatly decreases the chances of errors occurring since it’ll flag something if it doesn’t look right, along with eliminating room for misinterpretation as there is in handwritten data entries.

Understand deductions

Deductions are business expenses you can claim to reduce your company’s (or your own) taxable income. Often referred to as “write-offs,” deductions can be utilized by businesses of all sizes. These deductions are costs the business incurs that are “ordinary and necessary” for the industry in which the company operates. Some write-offs are fully deductible, while others are partial deductions.

To qualify for specific deductions (not everyone will have the same type of write-off), you must keep careful track of business expenses and have receipts to validate any claims. Here’s how it works: you add up your total qualified deductions and subtract them from your revenue. The difference will be the total amount of taxable income on your tax return.

Understand the laws and regulations

The IRS and state tax collection agencies have very specific rules and regulations all taxpayers must follow and comply with. Applicable rules and regulations for both individuals and businesses will depend upon their specific tax status and type of business structure.

You’ll also need to comply with specific accounting rules, if applicable, such as the Sarbanes-Oxley Act (SOX) of 2002 and the Gramm-Leach-Bliley Act, along with aligning your company’s accounting practices with generally accepted accounting principles (GAAP).

It is a good idea to familiarize yourself with relevant rules and how each one affects your situation. Consider speaking with an accountant, attorney, or other tax specialist to know what applies to you and ensure you follow the rules. If you don’t, you could face potential fines and penalties.

How Your Small Business Can Benefit From an Accountant

Small business accounting is stressful for many owners who must juggle ongoing operations, day-to-day tasks, and long-term processes, such as accounting, taxes, and securing data. Hiring a third party to help can go a long way toward ensuring your finances are in impeccable order. Your accountant can handle:

● Tax return preparation, filing returns, and, if necessary, filing tax return amendments

● Finding eligible tax deductions and credits

● Preparation of financial statements, including but not limited to balance sheets, cash flow statements, and income statements

● Managing and maintaining financial accounts

● Payroll

● Fixed asset accounting

●     Financial analysis, forecasting, and advice

The accountant you choose to work with should have a good reputation, have small business experience, possess proper licenses, provide references, and be willing to have an exploratory meeting to discuss your needs. Thorough communication and attention to detail are two other important attributes to look for in an accountant.

Efficient Small Business Accounting Software

One of the best small business accounting tips out there is investing in accounting software. You’ll quickly discover there are many different products on the market, and you won’t find a one-size-fits-all answer for businesses.

Do your research to determine which software best aligns with your company’s needs and goals. USA Today offers a list of recommendations to help streamline bookkeeping, while PC Magazine offers these suggestions. You’ll likely see some overlap in suggestions which makes them possible good choices.

Explore these and other online recommendations to assist in choosing a program that a) meets your company’s needs and b) at a price point that fits into your business’s budget.

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Be Sure to Obtain your EIN Number

Obtaining an employer identification number (EIN) is an important step to take because it is beneficial to your finances in many ways. You can open business bank accounts, hire employees, get access to more loan options, file business taxes, and be eligible for certain licenses and permits. Not to mention, it gives you a higher level of credibility as a business. To apply for an EIN, you’ll need:

● Name of business, your DBA name (“doing business as”) and business address

● Date you commenced doing business (either by startup or acquisition)

● Name of the individual responsible for the business and their SSN or ITIN

● Type of business entity structure (LLC, sole proprietor, partnership, or corporation)

● The reason why you’re applying for an EIN

●     Number of employees currently working for the company or estimate of how many will be hired

Even if you own a very small business where you are the only employee, it’s still beneficial to obtain an EIN. It gives you access to the above benefits and sets you up for potential future expansion. Plus, you don’t have to share your Social Security number with anyone you do business with if they need to report income or other important details for tax purposes since you can supply your EIN as a tax ID instead.

Conclusion

Operating a small business takes a lot of time and energy. Dealing with accounting can be cumbersome, especially if you don’t have a strong financial background because this means you’ll have to spend a good amount of time learning and keeping up to date on government, industry, or other financial requirements.

An easy small business accounting practice is to hire a professional accountant and invest in bookkeeping and/or accounting software to help streamline the process. This way, you maintain current and accurate financial records all year long, and when it comes to tax season, you are prepared and ready to go.

Investing in working with an expert and in software simply makes dealing with the financial end of running a business less stressful and overwhelming.

Taxes aren’t the most fun aspect of running a business, but filing a tax return is a necessary task. The U.S. tax codes for business are quite complex and, unfortunately, the government isn’t going to take misunderstanding them as an excuse for incorrectly filing a tax return.

Businesses (and individuals) must comply, so you want to get it right. If you don’t, you and/or your company can face stiff penalties, even if you accidentally were not compliant with tax laws. On the plus side, in their complexity, tax codes for businesses allow for opportunities to reduce taxes with deductions and credits.

In this post, we’ll discuss what IRS tax codes are, provide tips to help business owners better understand what they are for, and explain how knowing more about tax codes can help make filing easier.

What are IRS Tax Codes?

The U.S. Internal Revenue Service (IRS) tax code is a lengthy and comprehensive document that outlines tax laws passed by Congress and how they will be executed and enforced by the IRS. Many often wonder: what are tax codes? The term “tax codes” imposed by the IRS actually can be interpreted and/or used in two different ways:

a) a set of laws such as The Internal Revenue Code (IRC) or

b) a specific law within the IRC

The tax codes dictate how much in taxes is due and stipulate any credits and/or deductions individuals and businesses can take to reduce their tax liability.

U.S. Treasury’s role in federal tax code

The U.S. Treasury Department plays an important role in the IRS tax code. The federal tax regulations, also referred to as Treasury regulations, are “officially” interpreted by the Treasury Department and provide directions to U.S. taxpayers on how to comply with IRC requirements. The federal agency also gives explanations and examples of how the law is used.

As a taxpayer, you can read Title 26 as published by the Government Printing Office, which can be accessed and searched online through the official IRS website or the Code of U.S. Regulations website run by the National Archives. Here’s how you can find what you’re looking for:

● Look up “Title 26: Internal Revenue” to see the table of contents for up-to-date Treasury regulations

● “Go” to specific sections of Title 26 to find the current rules for a specific treasury regulation

●     Use the “search” feature to find what you need (e.g., you can search “gross income”)

Your local library will also offer pamphlets about specific tax laws.

Compliance with tax codes isn’t optional

When filing your or your company’s tax return, you must comply with all tax rules. Ignorance of the law is not an excuse, and the IRS will not be forgiving. By keeping up with the rules, which change frequently, you can better comply with IRC requirements, avoid expensive penalties, and lower your chances of getting audited by the IRS.Tip: You can also look for more information about revisions to specific tax laws here.

Interpreting the Tax Code

Many business owners find the tax element of running a company to be challenging. While you need to comply with the components of the federal tax code, you don’t have to actually read tax codes to follow them. The process is still complex, but you should know basic information.

Check out IRS publications for guidance

The IRS puts out publications to make interpreting the tax code much easier and more effective. Common ones to explore that will likely apply to you and your small business include:

Your Rights as a Taxpayer (Publication 1)

This is the publication you should explore first as it provides readers with the “The Taxpayer Bill of Rights,” explains taxpayer rights, and outlines the processes for examination, appeal, collection, and refunds as they relate to filing taxes.

Tax Guide for Small Business (Publication 334)

This guide offers general information about federal tax laws for self-employed individuals and provides details about business income, expenses, and applicable tax credits.

Small Business Health Care Tax Credit (Publication 4862)

This publication outlines eligibility guidelines and provides guidance on how to apply this valuable tax credit to small businesses.

Federal Income Tax Withholding Methods (Publication 15-T)

If you have employees, this publication is helpful since it outlines how to properly calculate federal income tax withholding from your employees’ wages.

Understanding Your EIN (Publication 1635)

A comprehensive and detailed pamphlet outlining what an EIN is, who is eligible, who is required, when a new EIN is needed, and other relevant details associated with using an EIN.

Starting a Business and Keeping Records (Publication 583)

In this publication, the IRS reiterates that business owners need to know their tax responsibilities in regard to launching a business and maintaining good records. The federal agency also poses helpful – and important – information regarding EINs and business structures, along with posing questions for business owners to ask themselves to help provide some direction and guidance.

Retirement Plans for Small Business (Publication 560 – 2023)

Small business owners don’t have pensions or their employers establishing their retirement plans. Essentially, entrepreneurs must usually fend for themselves when it comes to saving for retirement. Publication 560 explains the choices business owners have, including SEP (simplified employee pension) plans, SIMPLE (savings incentive match plan for employees) plans, and Qualified plans (also called H.R. 10 plans or Keogh plans).

How To Depreciate Property (Publication 946)

The IRS explains how to recover the cost of business or income-producing property through the use of deductions. To depreciate property in a business tax return: a) you must own it, b) the property must be utilized in your business or income-producing activity, c) it must have a useful life, d) it must be expected to be in use for a period of time exceeding one year.

Tip: Use specific keywords in the IRS’ search tool to find any specific rules you need to see and how they might affect your small business tax return.

Work with a tax professional

If you find filing taxes highly time-consuming or difficult to follow, it would be to your advantage to work with a professional tax expert, such as an accountant, attorney, or other tax specialist. Your tax expert will be up-to-date on the laws and will know which ones will apply to your business

At the very minimum, if you plan to file yourself, you should use tax software so you’ll have some guidance in walking you through the tax laws that might apply to your situation.

Obtain your Employer Identification Number (EIN)

Businesses that already have hired employees will need to obtain an EIN by law. If your company is a startup, you may not have taken this step, or if you’re the only employee, theoretically, you do not need an EIN.

Whatever the case, every business could benefit from obtaining an EIN, even if they are not required to do so by law. Benefits include:

● Future ability to hire employees without having to wait

● Obtain access to better business loan opportunities

● File business tax returns

● Avoid needing to use a personal Social Security number for business purposes

●     An EIN looks more professional than using your SSN

Ready to apply to obtain an EIN? Here are the steps you need to take.

● Gather the required documentation, which will include the following:

○ Legal business name

○ DBA (“doing business as”) designation

○ Business address and phone number

○ Date business commenced, either as a startup or acquisition

● List the name of the person responsible for the business

○ Include the responsible person’s (this is likely you) SSN or ITIN

● Note the business entity type of your company (e.g., sole proprietorship, partnership, LLC, S-Corp, or C-Corp)

● List your company’s tax structure (e.g.

● Select the reason why you need to apply for an EIN

● Share the estimated number of employees you have or plan to hire

● Answer a series of tax-related questions

●     Review your application to make sure you have correctly and fully answered all questions

Once you have your EIN application materials assembled, entered, and reviewed, you can submit your application. At this time, you are waiting to receive your EIN.

Conclusion

Learning the general basics of the IRS tax code is important. While you do not need to memorize codes, it’s a good idea to become familiar with the rules that apply to your company and, in times of need, know where to seek guidance so you can quickly get an answer or learn how to resolve the problem.

Accessing the various government publications, along with being able to reach out to find information online and/or organizations to help you, can make it much easier for small business owners to interpret any applicable tax laws.

Taxes are usually not the most enjoyable component of running a business, but it is necessary to understand, so you can set yourself up for success and avoid being penalized for making tax mistakes.

Running one’s own business is an exciting venture, but one of the challenges many entrepreneurs face is how to obtain financing to expand upon the dream. This is true for startups or for business owners seeking to grow their companies. Loans are often needed to help purchase equipment and supplies, cover payroll, open new locations, or expand upon a current facility.

It’s common for business owners to feel overwhelmed as they begin to secure financing, as the process can be a lot of work and intensive. Those who proactively invest time in understanding the complexities associated with the process, are likely to have a smoother and quicker experience. Here we’ll take a look at the basic steps you should take when you initiate the loan process.

Tips before you pursue a loan

Before you take the first steps required to apply for a loan, here are a few tips you should consider keeping in mind.

● Determine what business needs or projects you’ll utilize the extra money to finance

● Write a well-thought-out business plan to flesh out your business needs or projects to show lenders

● Explore different small business loan opportunities and understand the different types of financing available

● Familiarize yourself with and keep a close pulse on current interest rates

● Check your business’s credit score and history (check your personal credit standing as well)

● If you haven’t done so already, separate your personal and business accounts

● Factor in your ability to commit to a repayment plan alongside your business needs

Choose the right type of small business loan to apply for

Businesses can obtain loans in several ways, including banks, credit unions, and online lenders. Before applying for a loan, it’s helpful to first calculate your financial needs, determine how much you can afford to borrow, and learn about the different loan options.

Loans are definitely not a one-size-fits-all option. You’ll find diversity in loan types and interest rates. In the final quarter of 2023, the average loan rate ranged from 5.89% to 12.23%, so the rate is one of the factors you should weigh into your decision, along with whether you’ll qualify for specific loans. Common types of loans available to small businesses include:

Small Business Administration (SBA) loans

The SBA offers several loan options to small businesses ranging from $500 to $5 million. The primary types of loans the SBA offers include:

● 7 (a) loan program

● Microloan program

● CDC/504 loan program

● Disaster loans

To qualify, small business owners must meet certain requirements, which will vary depending on the type of loan sought.

Traditional loans

Not all business owners will find SBA loans as their best option, or they may not qualify. If you fall into this category, you might find pursuing a traditional business loan to be appealing. Popular traditional loan options include:

● Line of credit financing

● Term loans

● Secured loans

● Unsecured loans

● Equipment loan financing

● Working capital loan

● Invoice factoring

● Merchant cash advance

Depending upon your needs, obtaining a business credit card may also be a way you can utilize it to fund your business ventures. In most cases, this isn’t the best option, but does make sense, depending on how much cash the business needs.

Alternative lenders

For business owners who find it difficult to secure SBA or traditional loans, alternative lenders are sometimes a viable option. Interest rates are usually higher, but if the return on the investment is strong for the project the money is spent on, it might be worth the trade-off of a higher interest rate.

Evaluate lenders based on your business loan type

Once you finish exploring your loan options, you’ll want to compare and contrast lenders based on the loan type. To evaluate your loan options, consider the following.

● Check a lender’s minimum requirements to qualify for their loan(s), such as your credit score, debt-to-equity ratio, time in business, and annual revenue the company earns

● List all the loans you actually qualify for so you know feasible loan options

● Consider current interest rates and whether they’ll be fixed or variable, along with the length of the loan

● Compare the different loan offers from a variety of lenders to help find the best opportunity, including looking at application fees and repayment terms

● Determine if you’ll need to have collateral – and what type

It’s important not to rush into a decision. Carefully weigh options and consider where you project your business to go during the time frame you owe money.

Gather information like your EIN to apply for a small business loan

To qualify for most business loans, you’ll need to have an Employer Identification Number (EIN). This numerical identifier is similar to a Social Security Number, but it’s used strictly for businesses.

Your EIN will be helpful if you don’t have a business credit history, although, in this scenario, you may also need to supply your Social Security Number to the lender as well. If your company is well-established, you can use your EIN to apply for your business loan since your business credit score will be attached to your EIN.

If you do not have an EIN, it’s easy to apply! Aside from gaining better access to business loans, there are a variety of other beneficial reasons why you should have an EIN.

Submit your application for a small business loan

Once you fill out your loan application, be sure to meticulously go over it to make certain all the information you’ve entered is accurate. Mistakes may result in problematic issues, including loan application denials. Once you’ve ensured your application is correct and in order, you can submit it. If your application is accepted, be sure to review the loan terms before you sign on the proverbial dotted line.

Use the loan to build your small business!

Congratulations! You’ve successfully obtained a loan. Now that you have the capital you need, you can use this money for the projects you desire to achieve. Whether you’re launching a new business or expanding an already established one, having extra cash on hand can go a long way toward achieving your goals.