Most countries impose tax on businesses. It is usually based on the income or capital of the business and a similar tax may be imposed at state or even lower levels. Businesses treated as partnerships are generally not taxed at this level. Most countries tax businesses on income from that country.
Businesses may be taxed on their incomes, property, or existence by various jurisdictions. Many jurisdictions impose a tax based on the existence or equity structure of the business. For example, Maryland imposes a tax on businesses organized in that state based on the number of shares of capital stock issued and outstanding. Many jurisdictions instead impose a tax based on stated or computed capital, often including retained profits.
Most jurisdictions tax businesses on their income. Generally, this tax is imposed at a specific rate or range of rates on taxable income as defined within the system. Some systems have a separate body of law or separate provisions relating to business taxation. In such cases, the law may apply only to entities and not to individuals operating a trade. Such laws may differentiate between broad types of income earned by businesses and tax such types of income differently. Generally, however, most such systems tax all income of a business in the same manner.
One of the most common questions self-employed people (such as independent contractors, freelancers and consultants) ask is whether they are a “business.” The answer is, they’re both. Whether you run a flower shop or freelance as a website designer, you’re a small business. When we talk about small businesses in this book, we’re talking about all kinds of self-employed people, from independent contractors, consultants and freelancers to the guy who owns the burger joint down the street.
Everyone has their own idea on what a “small” business is. The typical U.S. small business grosses less than $1 million and has fewer than ten employees. That’s the size of the ventures this book addresses, but most of the tax information here applies to any size operation. As you might expect, when the dollars or employees increase, so do the tax complexities.
Types of taxes
- Taxes on income
- Social security contributions
- Taxes on payroll or workforce
- Taxes on property
- Taxes on goods and services
- Fees and effective taxes
Money provided by taxation has been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on
- the enforcement of law and public order,
- protection of property,
- economic infrastructure (roads, legal tender, enforcement of contracts, etc.),
- public works,
- social engineering,
- subsidies, and
- the operation of government itself.
A portion of taxes also go to pay off the state's debt and the interest this debt accumulates. Governments also use taxes to fund welfare and public services. These services can include education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities. Colonial and modernizing states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.
Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business, or to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working.
In addition, taxes are applied to fund foreign aid and military ventures, to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy; see also tax exemption), or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.
All businesses incur administrative costs in the process of delivering revenue collected from customers to the suppliers of the goods or services being purchased. Taxation is no different, the resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called the compliance cost and includes for example the labour cost and other expenses incurred in complying with tax laws and rules.
The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since, in reality, money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls.
Taxation Law for Small Businesses
Taxation law is a complex and in-depth area of concern for the small business owner. With potential pecuniary and criminal consequences, it is of paramount importance to ensure as a business owner, you are familiar with the tax consequences in your jurisdictions, and the ways in which you can minimise your liability. Whilst one of the most legally important things to understand as a small business owner, taxation law also provides an excellent opportunity for saving money and increasing profitability within a small business environment. In this article, we will look at some of the main and most common tax implications of running a small business, and some of the most effective ways of ensuring you pay less tax through your small business operation.
Tax regimes vary from jurisdiction to jurisdiction, and the implications of running a small business also vary, both in terms of the legal and financial requirements. Having said that, there are a number of common elements that transcend jurisdiction and appear in numerous guises across various systems that can be of use to the small business owner. One of the first things to consider as a small business owner is to establish a limited liability company. The primary reason for this is that limited liability companies usually provide a more relaxed tax regime as compared to income tax liability. A sole proprietor operating out-with the parameters of a corporate entity is liable to account for profits as income, which can lead to a greater tax liability and potential individual state contributions. As a corporate entity, the owner can pay himself via share dividends, which carry a lower tax liability and thus minimising his overall liability to tax. This is significantly better than paying oneself a wage, which bears the tax liability from both ends, i.e. the company is liable to taxation as is the employee.
Another essential for the small business owner is what is known as capital allowance. By means of capital allowance, business owners can offset the acquisition cost of assets on a graduated scale in accordance with the specific principles of the regime in question. This is in effect a deductible expense, which ultimately minimises yearly tax liability. There is a particular benefit in that many regimes allow an accelerated relief for business assets. This can be exploited to an extent by acquiring assets through the business, for example a car, which can also be used for personal purposes. Rather than buying a car from personal income, buying it through the company allows you to offset the amount of the expense quickly against your business profits, which ultimately reduce your liability to tax.
Before embarking on any tax reducing strategies, it is important to ensure you are acquainted with the specific laws of your jurisdiction to avoid running into trouble with the authorities. In some of Europe, for example, there is a requirement to declare any specific tax minimising strategies to the government to allow for rectification of loopholes. It is important to ensure you are acquainted with the specific laws to avoid potential criminal liability as a consequence of ignorance. By familiarising yourself with the laws in your jurisdiction, you can avoid the potential pitfalls and create a tax planning strategy that provides the most cost effective solution for you and your small business.
Tax Advantages for Small Businesses
- Personal expenses can become wholly or partially deductible: your home, car, computer, meals, education and entertainment.
- Retirement savings plans can shelter part of your venture’s income from taxes, accumulate earnings tax-deferred and provide for your retirement at a reduced tax rate.
- Family members—young and old—can be put on the payroll to shift income to them and reduce a family’s overall tax bill.
- Travel and vacations can qualify in whole or in part as deductible business expenses.
With all of these possibilities, your business can earn less than if you were working for someone else, and you still can come out ahead. Of course, by going into business you might be trading an eight-hour-a-day job for a 24- hour one. But for many of us, it is worth it.
Business Tax Service
There are a number of ways that you can find tax services companies. The yellow pages is a good place to start for companies in your area but, depending on where you live, the list of names may be extremely long. It is a good idea to ask your friends, colleagues and business partners to recommend the tax services that they have found helpful and efficient in the past. Then you can call the tax services professionals that you have on your list and discuss your requirements.
The first step in finding the best tax services for your needs is deciding what level of help you require. Perhaps you simply need someone who can file a simple tax return but has to wade through your slightly disorganised accounting documents, or maybe you have a number of employees and need assistance sorting out their tax withholdings or you may even want all of these tax services, and more. The size of the tax services company may also be an issue. You may want one person to be able to perform all of your tax work, especially if you are only a small business owner or you may want a team of tax professionals and you want to find tax services that have a number of specialists available. Once you have identified the type of tax services then you can begin your search more easily. Your available tax services budget is obviously going to be an issue but you should try to allocate as much money as possible to ensure that you can afford the best possible tax services. Remember that you can incur heavy fines if you have incorrectly filed your tax return or are late paying any type of tax that your business is liable for.
Apart from professional qualifications and references one of the most important points to consider when assessing which of the tax services companies you want to use is whether you feel comfortable with the person you are dealing with. At the end of the day you are going to trust them with your financial records and it is essential that you feel that you can depend upon the person.
Every business, at some time, needs the help of some type of tax services at some stage. Large organisations usually have their own tax services department with accountants and tax lawyers but small companies often have to hire tax services on a regular basis to help keep their tax returns and other issues in order. It is important to know how to find the best tax services, no matter what type of business you are involved with.
If you are looking for a tax lawyer you need to know how to find the best one possible. There are literally hundreds of sites alleging to have the best tax lawyer available and it may seem that they are all pretty much the same. However, as with all types of lawyers, there are good tax lawyers as well as bad ones and it is important to find the right one for you.
There are a number of questions that you need to ask any tax lawyer before you decide which company to hire. Obviously, experience is a key factor in narrowing down your list of potential candidates to a reasonably small number. If the tax lawyer you are considering has no recent experience with court cases then you should avoid using their services. This is because the tax laws are constantly changing and it is vital that your chosen tax lawyer is completely up to date with current legislation.
The track record of any tax lawyer is also important. If you ask any tax lawyer how many cases they have won, and lost, this will give you an idea of how effective they are at pleading your case. However, your individual circumstances should be taken into account and you need to ask the lawyer if they have had specific experience with a similar case and what the outcome was.
The best tax lawyer is one that specialises in more difficult cases and is more likely to be able to help you in whatever situation you find yourself.
The methods used by a lawyer in preparing your case should also be a consideration. Usually, a tax lawyer will be extremely thorough in investigating the circumstances surrounding your case and you should look for the most comprehensive service possible. A thorough tax lawyer will look into all of your financial records and gather evidence, of course, but will also look into any other mitigating circumstances to help with your plea.
Of course, any tax lawyer would like to claim that they can have any case against you dismissed but the reality is that this is often unlikely. You should discuss with the lawyers on your shortlist what penalties they anticipate you being given and how they plan to negotiate for lower ones. Obviously, you want to have a tax lawyer who can obtain the most lenient fines possible, even if the case against you is very clear.
Finally and probably most importantly, is the rapport that you feel when you are talking to the individual tax lawyer. It is essential that you are able to discuss everything freely and openly with whichever tax lawyer you finally decide to hire. If you do not feel comfortable talking with a particular lawyer then simply cross them off your list and move on to the next one.
Great Businesses were planned that way!
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