Business Tax - What Do You Owe?
 One of the challenges for business owners is knowing how to accurately determine the amount of business tax
they will owe the IRS each year. Savvy owners are able to predict what
their tax obligation is going to be, and plan accordingly.
In
order to make a projection that is anywhere close to your actual
business tax you need to know what things determine that final amount.
The answer lies in understanding your Profit and Loss Statement.
Income
The first thing you need to focus on is your
businesses income. In a nutshell, your income is your earnings minus
the cost of goods sold and your inventory.
Start by figuring up how much you earned in
sales for the year. If your business provides a service, your sales are
the fees you earn for providing your service.
Don't be
concerned with the amount just yet. Your business will pay business
taxes on the amount of profits you earn, not the amount of your sales.
The amount of sales is used to figure state sales tax, which is different from your federal business tax.
The
next step is to subtract the cost of the goods sold. That is the amount
that you had to spend in order to make the products that you sold. You
will also need to subtract out the amount of products that are sitting
in inventory. You will value your inventory at the cost of the
products, not how much you are selling them for.
The number
you have remaining is your total income for the accounting period. You
haven't arrived at the number you will use for paying your business
taxes yet. You are still showing how you arrived at your businesses
profit or loss for the year.
Expenses
All of the money you spend conducting your business
can be declared as a tax write-off when you are preparing your business
taxes. If you have employees, the salary you pay them is a business
expense. Anything you spend on rent, utilities, office supplies,
licenses, insurance, and marketing can all be used as business
expenses.
All of these things are listed in the "expenses"
area of the Profit and Loss Statement. When you get your total amount
of expenses figured out, that amount is subtracted from your "total
income" line. The amount you have remaining is your business's net
income. That is the amount you will use for determining your business
tax amount.
If your net income is a positive number, your
business showed a profit. If that number is negative, your business
suffered a loss. A profit means that you owe the IRS taxes. If your
business had a loss you will not pay any tax for that year.
Proving Your Numbers
It is important that you keep excellent records of
your business transactions throughout the year. If you are ever audited
the Internal Revenue Service is going to want to see proof of any and
all items listed. If the numbers seem reasonable they may not demand
proof but there are times when they will be very adamant about seeing
documentation.
Questionable Amounts
 There
may be times when some of the numbers on your Profit and Loss Statement
seem excessive. You may have started a marketing blitz that caused your
advertising line to seem too high, or you may have a huge drop in sales
for some reason, or you may have expanded quickly, showing a sharp
spike in expenses.
Whenever numbers seem out of line,
especially when compared to previous years, the IRS takes notice. If
the numbers are too far out of line it could trigger an audit. Because
these numbers affect your business taxes, the IRS is going to demand
that you can explain and show proof why the numbers are so different.
Excessive Losses
The IRS assumes that you are in business to make a
profit. They want to be sure to collect the business tax on those
profits. If there are several years in a row that your business shows a
loss, they will want you to prove that you really did lose money.
As
long as you can prove that you really do not owe any business taxes,
you will be all right, but you need to show proof that all of your
numbers are correct. That is why you need to be in the habit of saving
every receipt or piece of documentation in order to show that the
numbers you are using on your business tax filings are 100% correct.
To
learn more about how to determine your business taxes, you can talk to
a SCORE counselor for free advice. You can find them online at http://www.score.org/index.html.
Points to Keep in Mind
- You will pay business tax on any profits your business earns.
- Sales do not equal profits. You need to subtract your expenses to get to your profits.
- You need to be able to document every item that is on your business tax returns.
- You can determine the amount you will be taxed on by competing your business's Profit and Loss Statement.
- You pay taxes on net income, not total income.
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