Understanding What Small Business Tax Benefits Your Company Is Actually Eligible For
If you’re running a company with a few employees, you may think it safe to assume that you’re running a ‘small business’. But for tax purposes, there is no single definition of what a small business actually is.
Depending on revenue, operations and ownership structure, a company might be eligible for some small business tax breaks, but not others. Working with an experienced tax preparation service in Fort Lauderdale can help you understand which tax benefits you can take advantage of, but here are the basics:
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What factors the IRS consider
Although each small business’s situation may be different, below are the main factors taken into consideration by the IRS when determining tax benefit eligibility:
- Gross assets
- Gross receipts
- Employee count
- Shareholder count
However, even when the same factor is used, thresholds may vary, meaning that a company might qualify for one small business tax provision, but not another. Small businesses with changes to their revenue or operations, may even find that they qualify one year, but not the next.
The most common standards used to determine eligibility
Section 448(c) gross receipts test is a common standard used by the IRS to determine small business eligibility for certain taxes, and currently, businesses averaging annual gross receipts of $32 million or less over the prior three years, might qualify for a number of tax benefits.
If eligible, your small business may gain from these potential advantages:
- Use of cash accounting
For larger businesses carrying inventory, they must use the accrual accounting method. If your small business qualifies, you may be able to use the cash method instead. Typically enabling small businesses to defer taxable income until such time as payments are received, cash accounting can help enhance cashflow and make bookkeeping simpler.
- Simplified inventory accounting
Often complex and time-consuming, inventory accounting rules are the bane of many a small business. But if your company qualifies, you may be able to simplify the process by doing the following:
- Treating inventory as nonincidental materials and supplies, or
- Following the method of inventory used in your records and books
- Exemption from certain capitalization rules
Rules surrounding UNICAP, or uniform capitalization, demand that small businesses don’t immediately deduct certain direct and indirect costs, and include them in inventory instead.
If your small business qualifies for an exemption, it can benefit from simplified tax reporting and a reduction in administrative work associated with inventory maintenance.
- No limits on business interest deductions
A lot of small businesses are limited on how much they can deduct each year for their business interest expenses. But for those who qualify, exemption from this limitation may apply, enabling them to make a limitless deduction.
Some caveats to be aware of
It’s not always straightforward when trying to determine if your small business meets the threshold for gross receipts. It may be that revenue associated with entities under common ownership, might also have to be calculated. Additionally, a different set of rules may be applicable for companies operating for less than three years.
Other caveats may also be applicable, and working with professional accounting in Fort Lauderdale is the best way to determine your eligibility.
Your tax bill as a small business owner may not always be clear-cut, and with both federal and state tax regulations containing a number of provisions that can impact your final bill, it’s best to take a proactive approach and consult with a tax expert well in advance of tax season.
