Key Takeaways
- Understanding the tax implications of your business’s structure can help you file properly and identify your tax advantages
- Consider opening an account on the IRS website in order to easily access and view your tax filings and payments
- Your tax filings and IRS payments play a role in your loan application process, so it’s important to ensure you stay organized and up to date
Taxes aren’t fun, we get it.
However, filing your taxes properly and being aware of any tax advantages available to you can be the difference between your business’s success and prolonged stagnancy.
Not only will you be susceptible to costly fees and penalties, but improperly filed taxes can reduce your potential for savings and how you qualify for small business loans.
Many small business owners are often unaware of outstanding tax payments, delinquent filings, or even how their business’s structure is affecting the way their taxes are filed.
In the same vein, these entrepreneurs may also be missing potential tax strategies they should be taking advantage of and expenses that could be written off.
However, filing your taxes properly and being aware of any tax advantages available to you can be the difference between your business’s success and prolonged stagnancy.
Not only will you be susceptible to costly fees and penalties, but improperly filed taxes can reduce your potential for savings and how you qualify for small business loans.
Many small business owners are often unaware of outstanding tax payments, delinquent filings, or even how their business’s structure is affecting the way their taxes are filed.
In the same vein, these entrepreneurs may also be missing potential tax strategies they should be taking advantage of and expenses that could be written off.
Entity Structure & Tax Filing
The first common mistake many small business owners make is failing to properly understand the tax implications of their business’s structure.
Your business’s legal structure determines how income is taxed, who reports the income, what tax forms are required, and more.
Choosing the right structure can reduce your tax burden, simplify compliance, and potentially protect your personal finances from your business’s liabilities.
Let’s break it down:
Your business’s legal structure determines how income is taxed, who reports the income, what tax forms are required, and more.
Choosing the right structure can reduce your tax burden, simplify compliance, and potentially protect your personal finances from your business’s liabilities.
Let’s break it down:
Sole Proprietorship
- Flow-through taxation: Business income is reported on the owner’s personal tax return (Form 1040 + Schedule C).
- Self-employment tax: Owners pay tax on net earnings (Social Security + Medicare) via Schedule SE.
- No separate legal entity: The owner and business are legally the same.
- Quarterly estimated payments: Required if you expect to owe more than $1,000 annually.
- Deductible expenses: Home office, mileage, startup costs, etc.
Limited Liability Company (LLC)
- Choice in taxation: LLCs can determine how they wish to be taxed, offering flexibility based on the number of members and the business’s goals.
- Flow-through taxation default: LLCs can be taxed as a flow-through entity, or elect to be taxed as an S-Corp or C-Corp
- Self-employment tax: Applies unless taxed as an S Corp.
- Tax flexibility: LLCs can elect to be taxed as an S Corp or C Corp using IRS Form 8832.
- No double taxation (unless electing C Corp status).
S Corporation (S Corp)
- Flow-through entity: Income, losses, deductions, and credits flow to shareholders’ personal tax returns.
- Avoids double taxation: No corporate-level tax.
- Owners as employees: Must pay themselves a “reasonable salary” subject to payroll taxes.
- Tax filings: IRS Form 1120-S and Schedule K-1 for shareholders.
C Corporation (C Corp)
- Separate tax entity: Pays corporate income tax (currently 21% federal rate).
- Double taxation: Profits taxed at corporate level and again when distributed as dividends to shareholders.
- Tax filings: IRS Form 1120.
- Deductible expenses: Salaries, benefits, depreciation, etc.
- Can carry forward net operating losses and claim various tax credits.
Outstanding Tax Balances or Missed Filings
If you’ve miscalculated your business’s revenue, forgotten quarterly tax payments, or even run into software errors while attempting to file, your small business can easily rack up an outstanding balance with the IRS that continues to accrue interest over time.
Another common mistake on behalf of taxpayers is assuming that an extension to file taxes also means an extension to pay taxes. This is not the case, and this type of simple mistake can cost you and your business a lot of money over time.
The number one way to prevent oversights like these is by setting up an account on the IRS website. This centralized portal will help you easily access all your business’s tax info, including balances, payment history, notices, and tax transcripts.
Another common mistake on behalf of taxpayers is assuming that an extension to file taxes also means an extension to pay taxes. This is not the case, and this type of simple mistake can cost you and your business a lot of money over time.
The number one way to prevent oversights like these is by setting up an account on the IRS website. This centralized portal will help you easily access all your business’s tax info, including balances, payment history, notices, and tax transcripts.
Why Tax Planning Matters for SBA 7(a) Loans
When it comes time to apply for an SBA 7(a) loan, your loan underwriters are going to look at your tax records to ensure you do not have any outstanding balances or missed filings, as well as to ensure your business’s reported financial status looks accurate.
If there are issues with your taxes, this can slow the loan application process, delaying your access to the funds your business needs.
Keeping up to date with your taxes and ensuring your documents remain organized can help you qualify for the loan amount you desire.
If you’re looking to apply for an SBA 7(a) loan, but you’re unsure about the state of your tax filings, our team at NEWITY is ready to assist you however we can.
If there are issues with your taxes, this can slow the loan application process, delaying your access to the funds your business needs.
Keeping up to date with your taxes and ensuring your documents remain organized can help you qualify for the loan amount you desire.
If you’re looking to apply for an SBA 7(a) loan, but you’re unsure about the state of your tax filings, our team at NEWITY is ready to assist you however we can.
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