Naturally, the world of business taxes can be daunting for anyone. From annual filing to handling taxes, one must be aware of certain key tax terms to maintain compliance and healthy finances. Misunderstanding even the most basic tax concepts can result in a missed opportunity and costly taxes. We know how important tax planning is to your business’s success at 406 Consulting. That’s why we’ve outlined key tax terms in this guide that every business owner should know to demystify key tax terminology.
Why Business Owners Need To Understand Tax Terminology
Tax laws are constantly evolving, and being a business owner should probably be more than just a responsibility; it should be treated as a strategic advantage. Understanding the right tax terms gets your communications with financial professionals worked out better, your reports filled out correctly, and you be able to make more informed decisions. Being a seasoned entrepreneur or a startup owner, having an overview of the business taxes can provide you the courage to handle your finances. However, with expert tax planning, you can legally minimize your liabilities and do this without putting your business at risk of non-compliance.
On top of that, tax jargon can be uniquely complex to decode due to technical language, changing rules, and unique interpretation by industry and jurisdiction. There might be terms like 'depreciation' and 'pass through entity' that sound simple but have a very simple and important financial meaning. Without a clear understanding, business owners are at risk for failing to communicate properly with the accountant, making an error in the tax filings, or leaving money on the table for deductions or credits they might be eligible for. Being familiar with these terms helps you to fully engage in tax conversations and, as a result, make better and informed decisions when it comes to your finances.
Gross Income
The total revenue your business earns before deducting any expenses is your gross income. All sales, services, and other income streams are included. You need to understand gross income to properly report your taxes and find out what tax bracket you’re in.
Taxable Income
Taxable income is the part of your gross income on which taxes apply after claiming allowances as deductions and exemptions to reduce your taxable income. The calculation makes sure that you do not overpay or pay less than you owe.
Deductions
Deductions are eligible business expenses to your taxable income. Office supplies, travel expenses, and employee salaries are common deductions. Taking proper control of these expenses can reduce your business taxes significantly.
Credits
Tax credits work directly on your tax liability, dollar for dollar. There are two differences between deductions and credits: deductions decrease taxable income, whereas credits reduce the amount of tax owed. Such examples include the Small Business Health Care Tax Credit.
Depreciation
Depreciation is a way of spreading any large cost over multiple years to reduce its impact. It is an important idea for companies that are making big investments like equipment, vehicles, and real estate.
Capital Gains
Business assets include property or investments, and when sold the profits are also called capital gains. Its understanding how these are taxed is important to your business tax planning strategy.
Estimated Taxes
Periodic payments during the year to pay income that is not subject to withholding are estimated taxes. This applies to those who are self-employed and small business owners.
Pass-Through Entity
Income of a pass through entity is passed directly to the owners and is taxed at their individual rates. Examples include LLCs and S-corporations.
Withholding
The withholding is the part of an employee’s wages that an employer deducts for federal and state taxes. Payroll compliance requires managing accurate withholding.
Tax Year
Accounting period of 12 months to report income and expenses is called a tax year. Businesses can operate on an annual basis (January 1 to December 31), or alternatively on a fiscal year on dates selected by them. Changing the tax year can have a major impact on cash flow, tax planning and timing.
Audit
An audit is when the IRS or state tax authorities examine your business’s financial records. Keeping the proper records helps businesses to navigate the audit smoothly.
Payroll Taxes
Social Security and Medicare are payroll taxes that are required of employers to take from an employee's wages. Payroll taxes, if mismanaged, lead to severe penalties.
Section 179 Deduction
Section 179 permits expense deductions for the whole cost of essential equipment or software purchases in the year they are placed into service rather than depreciating them over time.
Self-Employment Tax
Self-employment tax is the Social Security and Medicare for those who work for themselves. You must understand what you are obligated to not underpay.
Net Operating Loss (NOL)
If the allowable tax deduction of a business is more than the taxable income, it is considered to have a net operating loss. These losses can be carried forward to be used to offset future tax liabilities.
Conclusion
406 Consulting has an expert team that helps you to get tailored qualified tax planning strategies that could maximize deductions, decrease liabilities, and stay legal. Every business is unique, so we will provide a solution that is designed to suit your specific needs. Whether you are planning an audit or optimizing your tax strategy, we are here to help you every step of the way.
Contact us today to make sure your business is efficient on taxes and ready for the future.
