Tax Resource Center
A library of blogs & guides to help you prepare to file your business' tax returns.
- With No SALT Cap Repeal in Sight, It Pays to Know if Your State Offers a Workaround
- 10 Documents to Save for Tax Season
- What Are the Tax Implications of a C-Corp vs. an S-Corp?
- 8 Tips for Managing Your Sales Tax
- Help! What to Do When You Need to Change Accounting Partners During Tax Season
- Why You Should Hire a Tax Professional for Your Business Tax Return
With No SALT Cap Repeal in Sight, It Pays to Know if Your State Offers a Workaround
Ever since the Tax Cuts and Jobs Act of 2017 placed a cap on the amount of state and local taxes (SALT) you can take as itemized deductions on your individual tax return, high-income earners have found themselves paying more federal tax. And though some congressional leaders fought hard to repeal the $10,000 SALT cap recently—threatening to withhold their support for the Inflation Reduction Act (IRA) unless it included SALT reform—in the end they agreed to vote for the IRA even though it left the cap unchanged.
What does this all mean for you as a business owner?
If you’re a partner or shareholder in an LLC or an S corporation, you may be able to take advantage of state-level SALT workarounds and reduce your tax liability.
How States Are Approaching the SALT Cap
The cap on itemized SALT deductions is due to expire at the end of 2025, unless legislators move to repeal or change it sooner. Until then, it limits you to taking up to $10,000 in state and local taxes as itemized deductions on your individual federal income tax return. If you live in a high-tax state, that figure probably represents only a portion of your total state and local tax liability—causing you to pay higher federal taxes than you would have without a cap on the deduction.
Not long after the SALT cap was imposed, legislators in some states tried to institute measures to allow individuals to bypass the cap, but the IRS and Treasury Department rejected those efforts. Then in late 2020, the IRS released guidance that allowed state pass-through entity tax (PTET) workarounds to the SALT cap for individuals who own partnerships, S corporations, and certain types of LLCs.
In states that have since adopted a PTET workaround, a pass-through entity can pay state taxes on business income rather than pass that tax liability onto the individual partner or shareholder. This in turn enables the individual to take any remaining state and local tax deductions—such as property taxes or state tax on non-business income—on their personal tax return, maximizing the deductions allowed under the cap.
To date, at least 23 states have instituted SALT workarounds and others are likely to follow suit.
What State PTETs Look Like
While the overall concept is the same, each state’s PTET workaround works slightly different. Let’s look at the specifics of two states as examples: California and Colorado.
California passed a PTET workaround bill in November 2021, called the Small Business Relief Act, then expanded it in February 2022 to include previously disqualified entities, including those with partnership or federal disregarded entity owners. Each qualified owner of the pass-through business entity makes its own election to participate in the PTET; it isn’t necessary for all qualified owners to agree to make the election. For any partner or shareholder who makes the election, the business entity can pay the state tax on the owner’s share of the business’s net income. Shareholders who elect to have their tax paid by the entity receive a credit against their California state income tax liability, with any excess credit available to carry over for up to five years.
In Colorado, the SALT Parity Act went into effective for tax years beginning on or after January 1, 2022. As in California, owners of S corporations or partnerships in Colorado can elect to have the state tax on their share of the business’s income paid at the entity level, enabling them to use any remaining SALT deductions on their individual tax return and reduce their federal tax liability. The legislation was modified recently to allow owners to make retroactive elections back to tax years beginning on or after January 1, 2018. To take advantage of this new provision, partners and shareholders must make their retroactive election on or after September 1, 2023 and before July 1, 2024, and the entity must file a composite amended tax return accordingly.
Before You Elect to Take a SALT Workaround…
As with any opportunity to reduce your tax liability, there are always implications to consider.
For instance, if you have income in more than one state it’s important to work with an experienced tax advisor to understand whether you’ll save money by electing into the SALT workaround or whether you might end up paying more state tax as a result. That could happen if one of the states you do business in has enacted a SALT workaround and another hasn’t, which could cause you to lose the associated tax credit for tax paid to another state.
It’s also important to know whether your state includes guaranteed payments and other income allocations in the taxable base, which could impact your tax liability, and whether your state allows a full credit on your individual tax return for tax paid at the entity level (which isn’t the case in all states).
These are just a few of the many implications to consider before you elect into a SALT workaround.
Are you optimizing all your business' tax credits & deductions?
10 Documents to Save for Tax Season
The best way to set your business up for success when it comes to filing your business tax return, aside from hiring a knowledgeable tax expert, is to gather your documentation and keep it in a safe place so you can share it with your tax accountant when the time comes.
If you haven’t had the chance to stay on top of your toolbox of documents or you’re a new business and this is your first-ever tax return then you will find the following checklist of documents helpful in getting started.
While a prior year’s tax return only applies to established businesses this is helpful for your accountant if you have switched firms or were filing on your own previously. This will allow your accountant to ensure you gather the same documents as prior years and to double-check if any credits or deductions were missed.
Your tax obligations change depending on your business’s entity type. And for startups filing their first return, the date on your organizational documents will inform when startup deductions can be claimed.
Since your year-end P&L statement focuses on your company’s revenues and expenses over the last year, it will provide your tax accountant with a formal record of your business’s financial activities to ensure the accuracy of your taxes.
Your balance sheet will show your company’s assets and liabilities, as well as the owner’s equity for the last year. It’s helpful to include the year before too, for comparison purposes.
Provide your EIN number and addresses for all owners and any information regarding changes in ownership that occurred the past year.
A list of your fixed assets and details regarding any asset acquisitions and/or disposals during the year will allow your tax accountant to determine if you have any capital gains or losses and how to account for them in filing a business tax return.
Since your depreciation schedules can play a role in tax deductions you can take, it’s important to provide them for the preparation of your tax return.
Your tax accountant will need to see your loan statements to view their balances at year-end. When it comes to your tax return, loans are not considered taxable income, and when they are repaid the principal payments can’t be deducted.
If your business operates in more than one state, your tax accountant will need by state detail of sales, payroll, and property to determine how the tax regulations of each state will be applied; as well as, which state return filings are required and how to apportion income.
Any insurance you have for yourself, partners, and employees will need to be shared, to calculate any potential credits you are eligible to receive and to determine potential non-deductible expenses.
If you’re wondering why keeping track of your documentation is so important, one way to rationalize this is to remember that there are quite a few tax forms that will need to be filled out to properly file your federal and state taxes. Depending on your entity these forms can change, but they will most likely include some of the following:
- Form 1040 or 1040-SR Schedule C: Profit or Loss From Business (Sole Proprietorship)
- Form 1065: U.S. Return of Partnership Income
- Form 1120: U.S. Corporation Income Tax Return
- Form 1120-S: U.S. Income Tax Return for an S Corporation
- Form 4562: Depreciation and Amortization
- Form 8829: Expenses for Business Use of Your Home
- Form 1045: Application for Tentative Refund
- Form 2553: Election By a Small Business Corporation
- Form 2848: Power of Attorney and Declaration of Representative
- Form 6252: Installment Sale Income
- Form 8822-B: Change of Address
- Form 8903: Domestic Production Activities Deduction
- State Tax Forms
What Are the Tax Implications of a C-Corp vs. an S-Corp?
Business are built on a host of decisions, big and small. One such decision is the type of entity you choose to register your business as and what implications this decision has for your business tax-wise.
Your choices? A C-Corp or an S-Corp. Both of these corporation types get their names from the section of the Internal Revenue Code that governs how they are then taxed. But what’s the difference?
A C-Corp is the default type of corporation, so you don’t have to actually do anything more than register to incorporate your business. To form your company as an S-Corp, however, you would need to file a further a form – IRS Form 2553. After filing the Form 2553, your company will become an S-Corp for federal tax purposes, but you might have to file additional documents at the state level so you’re also treated as an S-Corp for tax purposes in your state.
Another difference between the two types of corporation is ownership. Registering as a C-Corp will mean your company has no restrictions on ownership. You can have as many as you like! However, if you choose to become an S-Corp, your company will be limited to 100 shareholders, and all will have to be U.S citizens.
C-Corps can also issue multiple classes of stock, such as common and preferred shares. Whereas S-Corps can only have one class, meaning there’s only one type of shareholder which could make fundraising more difficult.
Pros and Cons of a C-Corp
Pros
- Easy formation – As mentioned above, C-Corps are much easier to form due to it being the default corporation type, so there will be less paperwork and admin to go through.
- Flexible ownership – Being a C-Corp also means you aren’t restricted in ownership, and so if you’re planning on potentially selling your company in the future, this one is for you.
- Raising capital – Due to the unlimited number of shareholders and the issuing of multiple classes of stock, it can make looking for funding through investors much easier too.
- Overseas business – C-Corps aren’t restricted to shareholders in the U.S, and so if you’re looking to develop your business overseas, then this corporation type may be the better fit.
Cons
- Double taxation – The main disadvantage to a C-Corp is that your business will face taxation at the corporate level and then again at the personal level if your company’s revenue is distributed as shareholder dividends. It means you could be losing money twice on your income, which could prove costly to many smaller businesses.
- No write offs – Being a C-Corp also doesn’t allow owners to write off tax on their personal income tax returns.
Pros and Cons of an S-Corp
Pros
- Pass-through taxation – For an S-Corp, its biggest advantage is its taxation structure. Businesses don’t have to pay twice on their income, they only need to report business income and loss on personal income tax returns.
- Income deduction – You can also deduct up to 20% of the income on your personal tax returns if you’re registered as an S-Corp.
- Tax write offs – You can write off your business’s losses on your personal tax returns. This is quite a significant advantage for newer businesses that are likely operating at a loss for the first few years.
Cons
- Harder to form – To register as an S-Corp, you have to go through additional paperwork both at the federal and state level, which could use up a lot of time, energy, and resource in your business.
- Limited ownership – As we’ve already mentioned, becoming an S-Corp will mean you will have to operate under restrictions when it comes to ownership. You will be limited to 100 shareholders and they all have to be U.S citizens.
- Harder to fundraise capital – And due to this limited ownership, it also means only one class of stock can be issued, so fundraising money from investors may prove to be more difficult because there’s no room to incentivize.
How Do These Corps Impact Your Company’s Taxes?
Knowing how your chosen corporation type will impact your business’ finances and tax obligations is vital.
For a C-Corp, you’ll be faced with a double taxation – the corporation will have to pay federal income tax on the net income, and the shareholders will have to pay federal income tax again on any dividends they receive. While C-Corp profits are indeed taxed twice, since the 2017 Tax Cuts and Jobs Act was brought in, the taxes C-Corps have to pay are a flat rate of 21%, regardless of income or company size.
For an S-Corp, you’re considered a pass-through entity for tax purposes, which means you’re your shareholders report their share of the business’ income and losses on their personal tax return. You will only have to pay taxes once at your personal income tax rate—you wouldn’t be subjected to any corporate tax. Additionally, S-Corps can deduct 20% of their income on their personal tax returns.
Are you optimizing all your business' tax credits & deductions?
8 Tips for Managing Your Sales Tax
If you’re a business that sells taxable products, of which the vast majority are taxable, then you’re required to collect tax from your buyers. Wholesale items, raw materials and sales made to nonprofits are excluded from sales tax. Sales tax is pretty simple if you have one physical location and don’t operate in the online markets, but with most businesses present online, it becomes a little more complicated.
Selling products online means you’re operating in a number of different states, many which have different tax rules and regulations, so you’ll have to collect different rates of tax from buyers. This is determined by something called a sales tax nexus. A sales tax nexus is where a business has enough of a presence in a particular state, using their infrastructure to make money, that they should be collecting sales tax from buyers and paying it back into that state. A nexus could be determined by factors such as:
- A physical location
- Employees
- Inventory
- A significant volume of e-commerce
To collect sales tax from buyers, a business needs a sales tax permit from every state in which you’re considered to have a sales tax nexus. Each state will then assign you a tax filing frequency and tax filing due dates.
Sales tax management can be daunting! So, we’ve pulled together 8 tips for understanding and managing sales tax.
The first step in effective management of your sales tax is to ensure that your financial records as a company are organized, clean, and in order. This will make staying on top of your tax responsibilities that much easier, as you’ll be able to clearly see your invoices and exactly where your sales are coming from.
This is especially pertinent for businesses that have a large volume of online sales across a number of states. Each state will have its own deadline on when sales tax is due, so you as a company need to ensure you’re aware of each of the relevant deadlines and stay on top of them all. Creating a calendar to mark each of your due dates will help in tracking these dates and maintain regular tax payments.
As well as knowing the exact due dates for payments, it’s also a good idea to check the method in which each state receives these payments. Some may accept a check, whereas other states may need you to make your payments online.
As we’ve already mentioned, every business needs a sales tax permit from each state it operates a nexus in. Therefore, before you even think about making a payment, you need to make sure that your business has all the needed permits to collect this tax from buyers in the first place.
Most businesses sell their products through a range of channels rather than the traditional one physical location. And even with e-commerce, this can also contain a number of channels, from a company’s own website to social media platforms – all of which requires sales tax to be collected.
State authorities still want to be able to check in with registered businesses, even if they didn’t collect any sales tax in a particular taxable period. And so, you still need to submit a sales tax return even if that tax is zero, or you could face having your permit revoked.
As each states has its own tax rules and regulations, they also make their own updates and changes to those rules that businesses are expected to keep up with and adhere to. Therefore, it’s key that your business stays up to date on the rules of each relevant state to ensure your fully tax compliant.
As well as knowing the tax rules and regulations for states, it’s also important to know and be aware of what the penalties are for late or incorrect payments. This is so you and your business are prepared for all types of scenarios (even accidental ones!), and avoid any ongoing legal issues.
Get 23 tips to keep money in your business during tax season
Help! What to Do When You Need to Change Accounting Partners During Tax Season
When a tax filing deadline is looming for your business, it would seem the worst possible time to think about changing accounting partners, right? Maybe not.
Despite your due diligence in choosing an accounting and tax partner, you might come to the realization that the provider you’ve been using for tax services isn’t up to the task. Rather than enter another tax season with a provider that isn’t serving you well, the right approach can help you move onto a partner that’s better suited to your needs, while avoiding the risk of missing a filing deadline, calculating your tax liability incorrectly, or experiencing other errors that your business simply can’t afford.
Know When it’s Time to Change Accounting Providers
Tax filing season is an overwhelming time for many small businesses. Even when you use an external tax return preparer, your internal staff will end up busy updating financial records, compiling financial statements, and gathering information needed to ensure a timely, accurate tax filing.
In the midst of all the activity that happens in anticipation of the upcoming filing deadlines, the idea of switching tax preparers may seem daunting. Even if you don’t feel your previous tax services provider can handle the task correctly and in a timely way, you might be tempted to just muddle through the current tax season rather than try to find a new tax accountant right now.
But getting your taxes right is too important to keep moving forward with a provider that isn’t meeting your needs. That’s why reasons like the following should trigger you to think about making the move sooner rather than later.
- You’ve experienced tax mistakes or have missed tax deadlines in the past, resulting in late filing penalties and interest or the added costs associated with filing an amended return.
- Your previous accounting provider didn’t fully capitalize on tax credits you may be eligible for, such as the R&D tax credit, small business health care tax credit, or the electric vehicle tax credit.
- You’ve tried to handle all your accounting internally and found it overwhelming alongside your leadership role, or you’ve used a bookkeeper with very limited experience and now your business has grown more complex or is subject to new tax regulations (for example, you’ve recently added locations in other states, you’re at least 25% foreign-owned and subject to new filing requirements, or you’re trading in cryptocurrency, such as bitcoin).
- You’ve outgrown the capabilities of your previous tax services provider—for example, you’re looking for someone who can go beyond filing your returns properly and offer proactive advice on how to reduce your tax liability.
- You’re uncomfortable with your previous tax accountant for any reason—perhaps they’ve failed to be responsive, they haven’t communicated in a clear or timely way, or worse, you suspect preparer negligence.
Switching Tax Services Providers Seamlessly
If you decide it’s time to switch tax services partners, but you’re concerned about potential delays or disruptions this tax season, there are several steps you can take to make the move more seamless, efficient, and effective.
- Don’t panic! A methodical approach can help you navigate a change in tax services providers without incurring additional costs or tying up your staff unnecessarily. The key is to be decisive, then move forward.
- Check that your company hasn’t already signed an engagement letter with your previous tax accountant for the 2022 tax season. Most bookkeepers, accounting firms, and other tax preparers send out annual engagement letters early in the calendar year.
- Consider filing an extension for your 2022 return, whether you file it yourself or ask your new provider to handle it. If you don’t think you can make the filing deadline (March 15 for an S corporation or LLC; April 15 for a C corporation), requesting an extension is a prudent strategy because it gives you an additional six months to file. But it doesn’t absolve you of paying your tax liability on time. To avoid late payment penalties and interest, you must pay 100% of your previous year’s tax liability or 90% of your current year tax liability by the original tax filing deadline, even if you file an extension.
- Begin looking for a new accounting provider as soon as possible. Check that your new partner has strong credentials (such as CPAs and experience working with other businesses with your legal structure); can provide proactive tax advice; is able to represent your company in the event of an audit; and can provide solid references from current clients (or, alternatively, you can find positive reviews online). Ask for details on their fee structure, confirming whether their tax preparation pricing is all-inclusive or if you could be hit with surprise add-ons (which have the potential to double or triple your tax preparation bill). And don’t underestimate the “personality test”: People do business with people they like and choosing an accounting partner should be no different.
- Provide your new tax services partner with your previous year’s tax return as soon as possible. They’ll be able to extract critical data from this document, which will speed up the process of filing an extension and getting your 2022 tax return underway.
- Be prepared to respond quickly with any other documentation your new tax accountant needs, such as tax returns from earlier years, current financial statements, information on any assets sold or disposed of during the tax year, your capitalization table, and details on any changes in ownership or partnership, for example.
- Once the immediate concern of your 2022 tax return is behind you, consider having your new accounting partner review your tax returns from the past few years. They can determine if your returns are accurate or if there are any errors or omissions that warrant filing an amended return. It’s also prudent to get ahead of your 2023 taxes by getting your tax planning ducks in a row now. A quarterly review with your new tax accountant is a great way to ensure your company is in the best tax position by asking questions about whether you’re making the appropriate estimated quarterly tax payments, what steps you can take to reduce your tax liability, and how to budget for the taxes you’ll owe based on the current year’s financial results.
Get 23 tips to keep money in your business during tax season
Why You Should Hire a Tax Professional for Your Business Tax Return
To DIY, Use Tax Prep Software, or Hire an Accountant?
When it comes to completing your business’s tax return, it would seem there are endless options to do so. So how do you choose the right option for your business? Is doing them yourself ever a good idea? Is tax preparation software as worthwhile as hiring a professional tax accountant? Is saving money in the short term good for your business in the long term? We’ll answer all of these questions and more upcoming.
What You Should Know About DIYing Your Taxes
As a business owner, you’re probably familiar with the concept of bootstrapping. And you’re likely the person prepared to take on any and every task that needs to get done because at the end of the day your business is your responsibility. So why should your business’s tax return be any different, especially since you can save money on the preparation? And to that, I say, “At what cost do your DIY efforts come?”
We all know that time is money. With that in mind are you prepared to pull together all your documents, research the proper forms, instructions, and rules and then navigate filling out the applicable tax forms, and finally checking and recheck your work? This alone could take you 20-50+ hours depending on the complexity of your business and how comfortable you are with tax forms.
On top of the actual time you would have to spend preparing your own tax return, you also have to consider the cost of missing deduction and credit opportunities and making mistakes in your calculations. The tax code is something like 70,000 pages long, and it’s a tax accountant’s job to be familiar with the ins and outs of the tax code as they relate to your business. How familiar are you with the tax code and how comfortable are you with translating how it relates to your business? All this to say, there’s simply a lot to take into account and we wouldn’t want you to miss out or heaven forbid make a huge mistake costing you more time and more money than you’ve already committed.
What You Should Know About Tax Prep Software
If the idea of preparing your own tax return scares you, you may think the next best thing to a DIY job that will still save you money, is using a tax preparation software like TurboTax. Though a tax prep software seems like a great middle-ground between a full DIY and hiring an accountant, it still misses the boat in a number of key areas.
We will admit, that tax prep software does have the magical advantage of somehow taking your crummy cell phone pictures of your W2 and inputting that information into a tax form automatically, but the buck stops there. Tax prep software is really only good for one thing, basic tax compliance. They rely on their programming to determine deductions and credits, so they can’t get creative and identify specific ways to save you money. Also, if you’re not that familiar with the tax code, you may not know how to answer the prompt questions within the software to begin with.
They’re not a real person and don’t know your business history so they can’t ask the right questions to ensure all of your documents have been accounted for and all applicable credits and deductions have been included. And maybe most importantly, they can’t provide any tax planning advice.
The bottom line is, business tax returns are already more complex than personal tax returns, and the more your company grows and expands the more complex your tax circumstances can become essentially making the “ease” and “cost-savings” offered by a tax prep software obsolete.
The Benefits of Working with a Tax Accountant
We’ve touched on the DIY route and the tax software route, and now it’s time to discuss the star of the show, the big wigs of tax season, a professional, certified tax accountant. Tax accountants are worth the potentially higher price point for a number of reasons including the following:
Whether you go full DIY or semi DIY with a software, there is no one to turn to but yourself (and Google) to ask your tax questions and make sure you’re preparing your return properly. But with a tax accountant, you can have face-to-face conversations about your business’s taxes, build an ongoing report, and history that will help you maximize your tax planning opportunities in the long term.
For example, each year your tax accountant can audit and review your prior year’s return to ensure you include everything you worked up last year and any new opportunities based on the prior year’s activities. Or if your business switched from an LLC to a C-corp, your accountant will be able to help you understand the difference in tax requirements and make sure you’re meeting any new requirements.
If 2020 and 2021 taught us anything, it’s that the tax code is evolving all the time. And depending on the year, this can have major or minor impacts on your tax obligations, but often includes knowing tax code nuances, the potential for new forms, and newly required documentation. As a business owner, you’re likely knee-deep in leading your company and don’t necessarily have the time to make note of every tax code update to determine how it affects your business return. But your tax accountant participates in continuing education and has access to sound information on tax code updates through their certifications and industry organizations which help them apply updates properly to their client’s returns.
Conversations about taxes often center on two focus areas, tax planning, and tax compliance. The former is more about planning business operations and transactions before they occur to minimize tax obligations at the end of the year while the latter is about tax prep, forms, checking boxes, and meeting government requirements.
While tax prep software is great and all, it’s really only useful for tax compliance. Business returns are already more complex than personal returns, and the bigger the business becomes, the more impact financial decisions have on your taxes and the more complex your return gets. A tax prep software simply can’t offer tax planning advice, that’s not their purpose. However, a tax accountant can, and the longer you work with your accountant and the more report you build the better and better the tax planning advice they can provide!
Though you might be able to brag to your friends about doing your own taxes, can you say you did them exceptionally well? Can you say you found a little-known tax credit that saved you thousands of dollars? Can you say you weren’t even that sad about writing the IRS a check? I imagine probably not.
It can be more than difficult to DIY or even use a software and expect to find creative, not run-of-the-mill tax credits and deductions if you have no tax expertise. Just because you know how to wrap a sore knee with an ace bandage, doesn’t make you a medical expert, and no one would expect that of you either. The same goes with the tax code, just because you can file your own return, doesn’t mean you’re an expert and we don’t expect you to be either.
A professional tax accountant, however, is an expert so you can expect more of them when it comes to discovering great ways to reduce your tax burden. It’s their job to stay informed on the tax code and provide tax planning advice to you.
How Can a Simple Startup Tax Expert Help?
Decoding the federal tax code should be the priority of a trusted fractional tax partner, not another thing on your to-do list. Simple Startup’s tax experts and CPAs take the time to get to know you and your business so they can help you manage your business’ taxes with care and precision.
Our tax experts work with you to really understand your business and industry so we can ask the right questions to maximize your deductions and minimize your stress. Our services include tax preparation, assistance in calculating your estimated quarterly tax payments, advice on sales tax and filings, support in filing annual reports, and answering questions regarding payroll tax, personal property tax, and others.
