Small Business: Top Tax Challenges and How to Resolve Them

According to a recent survey by NFIB Research Center, 90% of small business owners report that high business income taxes impose a significant financial and administrative burden on their businesses. As such, nearly 91% of them hire professional tax preparers to help file their tax reports. Sixty-five percent say they hire a professional for compliance purposes. Another 59% reported “complexity of tax laws” as a major factor for their hiring.

Dealing with taxes is indeed tricky for small businesses. Every few years, policy changes tend to take effect, creating compliance risks. For example, at the end of 2014, the Affordable Care Act (ACA) was enforced, requiring small business owners to include it in their tax planning agenda. The mandate was pushed out to 2016, but still, it increased the burden of small businesses starting in 2015.

What Happens if You Failed to Pay Your Taxes?

If your small business fails to pay its correct taxes or fails to pay them on time, it may be subject to interest and penalties. The IRS sets tax return dates for each business legal structure. The filing date is also the due date.

For a small, sole proprietorship filing their business taxes on Schedule C, the due date is every April 15. It’s the same due date for filing your personal taxes.

For partnerships, the due date is on the 15th day of the third month after the tax year ends. For example, if your partnership business’s tax year ends on December 31, its taxes are due on March 15 of the following year.

For corporations, their taxes are due on the 15th day of the fourth month after the end of their business tax year. So if their tax year also ends on December 31, their due date is April 15 of the following year.

S corporations are subject to the same rule as partnerships. Hence, if their tax year ends on December 31, they must also pay their taxes on or before April 15.

The due dates of limited liability companies (LLC) are different. Single-member LLCs pay as sole proprietors, so their due date is April 15. Multiple-member LLCs are taxed as partnerships, making their due date typically fall on March 15.

The IRS gives one automatic extension to individuals and businesses filing their tax returns only. You must still pay your taxes on time regardless of the extension.

Tax Challenges

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If the rules are clear, why are small businesses still facing challenges? The common reasons often have something to do with policies, such as:

  • The Affordable Care Act (ACA)

The ACA aims to help reduce the healthcare expenses of low-income individuals and families. As such, employers are required to offer a health insurance plan that covers “essential health benefits.” These include hospitalization, laboratory services, pediatric services, mental health, and substance use disorder substances, breastfeeding, and more.

The ACA mandates all Americans to have health insurance. It should come either from their employer, through the ACA, or from another source. Failure to comply results in penalties. This will urge you to offer costly health insurance plans to your employees.

  • Deduction Eliminations and Limit Reductions

For instance, you can receive tax credits from certain practices, like hiring veterans. It used to give employers a credit of up to $9,600. But the policy was removed. The IRS used to give tax credits to companies going green but took back the policy some time later, removing tax savings.

Solutions to Tax Challenges

Like most small business owners, you can hire a tax professional to resolve your tax challenges. Enrolling in the Fresh Start program for debt resolution can help. It will let you organize your tax debts and ensure compliance without missing a beat. This can reduce the legal risks you face regarding your tax returns.

If high taxes are your main problem, you can change your business structure. For example, an LLC is subject to Social Security and Medicare taxes. If this is your business structure, you can switch to a sole proprietorship to avoid paying the employer-side of those taxes. But consider other factors before making the switch. It’s an effective way to reduce tax debt, but it could come with other risks.

Deduct your travel expenses as well. Luckily, travel opportunities are limited today, so you shouldn’t incur high costs. Still, if your personal taxes are driven high by personal travel expenses, cut back. Try to combine your personal travel with a justifiable business purpose as business travel expenses are tax-deductible.

Over time, you’ll get the hang of tax filing. But policy changes occur unpredictably, so prepare for new challenges now and then. Study the law and be guided by an expert if necessary.

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