There are so many business taxes that it is important to understand the general categories of business taxes and how they will affect your business. For more information on the five states to form your business with the lowest amount of business taxes, see our most recent blog post on
the best five states with no to lowest business taxes.
Assets and Depreciation:
Businesses invest in major equipment, vehicles, machinery, or furniture as a cost of doing business. Also included can be franchise fees, buildings, or even raw land. Capital assets are defined as major assets used in the operation of business in excess of more than one year and as such are subject to special tax treatments. Generally speaking, the entire cost cannot be deducted in one year.
- The basic calculation is taking the base cost and deducting it as an expense over the number of years that it will be used. Typically, the assets estimated drop in value each year will be applied as a framework for how much to depreciate it. In essence it is deducted down to the fair market current value.
- A value called the “salvage value” is the un-deducted amount which remains leftover at the end of the asset's usage life.
- Of course as it is difficult and time consuming to estimate depreciation rates on the far ranging types of assets involved in businesses, two methods are generally used by tax professionals.The straight-line method uses an annual depreciating percentage for assets, while the declining balance method uses more depreciation in the asset’s earlier years.
- As customary and standard, the IRS has specific rules dictating how deductions for depreciation for tax purposes are to be calculated.
Self-Employment Taxes and Net Profit-Loss:
After the overall calculations that have been previously listed in arriving at taxable income, the final considerations are self-employment taxes. It is for these reasons that many tax and legal professionals recommend forming a corporation or limited liability company for your business.
- Self-employment taxes. Sole proprietors will pay self-employment taxes on the full amount of taxable income for the business. Corporations and limited liability companies on the other hand use a different formula and are given many benefits by the IRS with respect to this category.
- Net operating losses. Businesses quite obviously produce different financial numbers each year. Some years may produce profits while others will produce losses. It is important to think ahead as loses can be carried forward and applied towards profits. From a tax planning perspective, this of course is always a consideration to keep in mind.
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