Every small business owner has to contend with taxes. Regardless of the industry or the size of a company, city, state, and federal taxes can add complexity and cost to your operations. You may even sometimes entertain the idea of moving your business to a low-tax location to save money and reduce headaches. While small businesses should consider taxes when planning for the future, saving money on your taxes should rarely be the sole factor driving your decision-making. Here are two major types of taxes business owners face, along with considerations to help guide your thinking on the topic. Tweet This
Retailers and restaurants are among the businesses that collect sales taxes to be forwarded to local and state governments. These taxes generally require little planning since they’re based on sales activity, and the amount owed is collected from customers when they make a purchase. However, doing business in a city or state with a high sales tax can make your prices less competitive when compared to companies in nearby locales with lower tax rates.
So why doesn’t every business move to a city or state with a low sales tax? Part of it has to do with access to customers and markets. Many large cities, such as Chicago, Seattle, and Los Angeles, are subject to high city and state sales taxes. They also offer access to many customers and advanced transportation infrastructures that can make doing business more profitable. In addition, the Tax Foundation notes that the application of sales taxes varies widely.
For instance, many states exempt groceries and clothing from standard sales taxes. Business-to-business transactions may also be sales-tax free, with the city and state collecting their share when the final product is sold to customers. This means that sales taxes often affect different businesses in different ways. Taxation that seems unreasonable to the owner of a wine bar may have little bearing on a grocery store’s balance sheet.
Income taxes present more significant planning challenges to business owners. Your company’s sales will probably vary from year to year, and a business’s structure has significant implications for how its earnings are taxed.
In a sole proprietorship, the business’s earnings are reported as part of the owner’s personal income tax. This can greatly simplify the filing process during tax time.
Many companies, especially larger business, choose to incorporate. Corporations may be able to take advantage of more generous tax deductions that are not as easy to claim when you’re self-employed. This can result in a lower overall tax rate.
Understanding the total impact of income taxes on your business will require an analysis that considers all of the costs and benefits. It’s usually wise to compare all costs in current dollars while also recognizing that dollars in the future will generally have less buying power due to inflation. Consult with a tax professional to see if your business is handling its income tax concerns in a prudent manner.
Keeping Taxes in Perspective
Taxes can be an emotional topic for business owners. You might feel like your cash flow is adversely affected due to burdensome taxation. However, the success of a business is based upon much more than the taxes it pays. Business owners should regularly evaluate supplier relationships to ensure that they’re getting materials at a low cost. Revisiting pricing strategies can help identify places where you’re out of step with competitors, which could be costing you sales. Companies that lease space ought to try and keep their rent as low as possible.
While business taxes should be a part of planning, it often pays to focus on profits first. Don’t forget that generating sales is the primary means of growth for your business. To learn more about growing your business if you are in construction, manufacturing, or supply, visit our industry pages.
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