Small Business Sales Tax

The advantages of small business tax deductions appeal to entrepreneurs whether transactions are conducted from the corner of a dining room table or the corner office of a company headquarters. The national Small Business Administration (SBA) doesn't provide a strict definition of which companies are considered in this category or put limitations on the total amount of sales or the number of employees. Some businesses can be quite large and still be included under the auspices of the SBA for receiving government assistance, such as low interest loans, and for tax purposes. Though the actual statute and regulations are more complicated, the simplest criteria are that the company is independently owned and doesn't dominate the particular industry. Whether the company is considered in the SBA category varies according to the industry. An important aspect of running a company is keeping meticulous income and expense records. Equally important is the proper collection of small business sales tax to be remitted to the appropriate state agency.

A benefit of the growth of the Internet has been a proliferation of sole proprietorships and partnerships. The Internet makes it extremely easy for sellers and buyers of goods and services to connect with each other. Online auctions and some other company websites have created an easy way for individuals to open up virtual stores with very little expense. Many people have gotten a start in business by searching through their attics and garages for items to sell at popular auction websites. Improved technologies and security safeguards have increased consumer confidence in making monetary transactions which has further increased the popularity of Internet sales. Jumping on the virtual store bandwagon is a great way for individuals to make extra income without leaving home. The small business tax deductions allowed by the Internal Revenue Service is another incentive for establishing even a small Internet presence. A person who establishes a business, whether online or at a physical location, as a sole proprietorship can usually complete a Schedule C Profit or Loss from Business to include with the other income tax forms. On this form, the sole proprietor adds the totals of various expenses to come up with either a profit or a loss. Though the IRS usually allows a loss for a couple of years (since start-up expenses can be hefty), the agency also provides guidelines for determining whether the venture is a bona fide company or just a hobby. Anyone filing Schedule C should be making legitimate efforts to earn a profit.

Of course, the more complicated the company structure, amount of sales, and number of employees, the more complicated the record-keeping and reporting requirements become. Basically, the IRS allows small business tax deductions that are "ordinary and necessary" for the particular industry. By opening even a tiny sole proprietorship, an entrepreneur can deduct Internet and cell phone costs, office supplies, postage, professional fees (such as for an attorney and an accountant), and other costs of doing business. These are separate from the calculation for the cost of goods sold which will need to be determined when completing Schedule C. Capital expenses are also handled separately and personal expenses do not belong on the form at all. The IRS provides helpful information on its website to assist entrepreneurs in complying with the rules and regulations.

Two areas that can create a great deal of confusion are the legitimacy of a home office deduction and travel expenses. Prospective entrepreneurs may wish to download the following material from the IRS website: Publication 587 Business Use of Your Home and Publication 463 Travel, Entertainment, Gift and Car Expenses. A link is also available to Standard Mileage Rates which can be very beneficial. Being able to deduct the expenses of a home office, which includes a percentage of the monthly mortgage or rent payment and a percentage of the utilities can significantly lower the company's taxable income. It may also subject the tax return to more scrutiny or even trigger an audit. Therefore, it may be prudent to seek a professional opinion from an attorney or accountant when utilizing a home office deduction. This is a good example of a time to heed this advice: "Every prudent man dealeth with knowledge: but a fool layeth open his folly" (Proverbs 13:16). Certainly, it's folly to disregard the tax code, though it is prudent to take advantage of every legitimate deduction offered by the government.

Prudence is also needed when it comes to understanding the small business sales tax. The federal government has not levied a national sales tax, but almost all the fifty states have. The rates vary from state to state and, because of add-ons by counties and municipalities, sometimes even from one locale to the next. For example, the state sales tax rate for the Florida is 6%, but counties may add to that rate. Purchases made in the popular tourist destination city of Orlando are taxed at a 6.5% rate while those made in a neighboring county are taxed at 7%. The entrepreneur will need to educate herself about the requirements of the city, county, and state where she establishes her company. She also may need to know the requirements of other jurisdictions where sales are completed. Her company will be required to collect the appropriate amount of money from her customers and then to pass those funds on to the proper state agencies. Depending on the jurisdictions involved and the amount of sales (both in volume and monetarily), this can become a record-keeping nightmare and may require the services of a trained accountant or, at the very least, a savvy bookkeeper. The entrepreneur not only needs to know when to charge such fees, but also when the law requires a small business sales tax to be paid. The owner can apply for a resale certificate that exempts him from paying sales tax on wholesale items that he plans to resell at a profit.

It's quite possible that there has never been an easier time to startup one's business. Even a tiny venture can provide significant advantages through appropriate use of small business tax deductions. But the entrepreneur needs to be prepared to do homework on the rules and regulations, both in collecting and paying, of the small business sales tax for her jurisdiction and those of her customers.

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