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Understanding Federal Income Tax Obligations

Filed under Federal Taxes. Fact checked on October 14, 2014.

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Every small business owner must have a basic understanding of federal income tax law. Knowing the law helps you avoid paying too much in taxes and protects you from the risk of paying too little.

The thought of spending time reading about income taxes probably rates right up there with having a root canal without pain killers. What's more, if you're like most small business owners, you pay an accountant or other professional adviser to handle your taxes.

So why should you spend your time reading about income taxes?

One good reason is that you'll have a much better understanding of the various tax choices that your tax pro may lay out for you. Also, with a little knowledge on selected topics, you'll be able to identify potential tax advantages - and tax traps - in time to do something about them. Wouldn't it be nice not to hear your tax pro say, "I could have saved you a lot of money if you had told me sooner that you were thinking about . . ."

Our goal is to call your attention to those income tax provisions most likely to affect a small business owner to help you take control of your federal income taxes. For starters, we've provided articles explaining tax issues in plain English, including these critical topics:

  • The basics of tax planning explains the difference between permissible tax avoidance and impermissible tax evasion.
  • Selecting your business form examines how your income tax obligations are affected by the operating structure (sole proprietorship, partnership, corporation, etc.) you choose for your business.

  • Defining your trade or business discusses how the IRS distinguishes between a business operated for profit and a hobby operated for personal satisfaction. It also discusses the difference between a business and a passive investment activity; provides guidelines on deciding whether your business activities should be treated as more than one business; and discusses tax identification numbers and IRS business codes.
  • Tax year and accounting methods enables you to make an informed decision when it comes to picking your tax year and accounting method.
  • Business income helps you determine the types of income that should be reported on your business tax return. You will also learn how to compute the cost of goods sold for those who carry an inventory.
  • Business deductions help you ensure that you don't miss any of the deductions to which you're entitled by explaining the basic rules that apply to all deductions, as well as the rules on record keeping. We cover the special deduction rules that are most important to small business owners including the rules that apply to home offices, meals and entertainment, travel, startup expenses, business gifts, casualty losses, employees' pay and benefits, and compensation for the owners.
  • Vehicles and taxes provide more details about the tax treatment of automobiles that you or your employees drive for business purposes.
  • Capital assets and depreciation explains how to handle the purchase, use, and disposition of major business assets, from a tax perspective.
  • Net profit, loss, and self-employment taxes articles deal with what you have left over, after subtracting your business deductions from your income, and covers the issues of net operating losses (NOLs) and self-employment taxes for business owners.
  • Claiming tax credits highlights the role that business and personal tax credits can play in minimizing your tax bill.
  • Dealing with the IRS describes the procedures and forms used by sole proprietors, partners, and corporations, and identifies the dates by which you should plan on sending off checks to the IRS, including those for estimated taxes. It also offers a few tips on avoiding tax audits, and on handling an audit if your tax return is selected.
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To obtain the current IRS tax forms that you need to complete your tax return, visit www.irs.gov.

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