Owning a small business is quite different from running a large company, as small business owners often face different issues and tax questions than that of those who manage a corporation or LLC/LLP. I receive a lot of questions from self-employed individuals and small business owners in San Francisco, especially when it comes to tax issues. Here are five of the most common small business tax questions.
Can I deduct my home office as a business expense?
According to the IRS, to deduct expenses related to the part of your home used for business, you must meet specific requirements. You must use the part of your home that you plan to deduct exclusively and regularly as your principal place of business. Additionally, you can deduct the space if you exclusively and regularly use it as a place where you meet or deal with patients, clients or customers in the normal course of your trade or business.
What’s the difference between a Form W-2 and a Form 1099-MISC or 1099-NEC?
A Form W-2 is used by employers to report wages, tips and compensation to employees, as well as report the employee’s income and social security taxes withheld. Form 1099-NEC is used for independent contractors, not employees, and are used to report payments of at least $600. Form 1099-MISC is used to report payments of $10 or more made in the course of a trade or business in gross royalties or payments of $600 or more made in the course of a trade or business in rents or for other specified purposes. All three forms are provided to the IRS.
Do I pay my income taxes quarterly or at the end of the year?
Small business owners are required to file an annual tax return. However, the federal income tax that you owe can be paid whenever you want. If you expect to owe more than the amount allowed by law at the end of the year after deducting any withholding on other income and refundable credits, you should make quarterly estimated tax payments or increase the withholding on other income subject to withholding. You can use a Form 1040-ES that will determine how much you should make as estimated tax payments. Those payments should be made quarterly and should be claimed on your individual income tax return as a payment.
Are business gifts tax deductible?
Generally, yes, if you give business gifts in the course of your trade or business, you can deduct all or part of the costs. However, there are some limitations. First, you deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year. Incidental costs such as engraving, packing or shipping aren’t included in the $25 limit if they don’t add substantial value to the gift. Additionally, do not consider gifts costing $4 or less that have your business name permanently engraved on the item and which you distribute on a regular basis. Finally, any item that could be considered either a gift or as entertainment (e.g. concert tickets) is generally considered entertainment and cannot be deducted. Always keep records that prove the business purpose of the gift as well as the details of the amount spent.
How do you distinguish between a business and a hobby?
The big difference is that a hobby activity is not done for profit. Generally, a business makes a profit in more years than not. Other factors that distinguish between a business and hobby are whether you depend on income from the activity for your livelihood, and whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
Owning a small business takes a lot of work and navigating the tax aspects can be tricky. You do not need to know everything yourself. Consult a tax professional or experienced San Francisco tax attorney so you won’t be surprised by the IRS or come tax time.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
