Business tax, either corporate or partnership, can be extremely complicated. However, some basic knowledge can go a long way as business owners launch, operate, and adjust their business operations. These readings will help you understand the tax regime currently in place.
The Tax Policy Center has prepared a number of articles for this very purpose. Read:
- What is the standard deduction?
- What are itemized deductions and who claims them?
- What are personal exemptions?
- How do federal income tax rates work?
- What are tax credits and how do they differ from tax deductions?
As you have learned, partnerships and entities that have elected to be taxed as partnerships fall under the partnership pass-through tax structure. This NOLO article provides a great summary of partnership tax.
Corporations, on the other hand, are taxed at the corporate level. This article from the Tax Policy Center reviews corporate tax basics. As the article points out, shareholders in a corporation are subject to double taxation: the corporation pays taxes on profits, and the shareholders pay taxes on dividends that are distributed to owners.
It is important to remember that businesses are not taxed on revenue, but on profit. As such, businesses must track all business expenses (also known as deductions) so as to pay tax only on their profits. The IRS has published this page to help small business owners to appropriately deduct permitted business expenses.
Some small businesses use accountants to keep track of income and expenses. Many now use online programs such as QuickBooks or Xero. These programs track the accounting and allow business owners to pay estimated taxes on a quarterly basis. This allows business owners to spread out their tax liability throughout the year rather than having one large tax bill at the end of the year.
Tax rules change regularly with new administrations. Business owners should review proposed changes to ensure that they are prepared for changes in the tax code.