8 Common Tax Questions for Small Business Owners, Explained

Filing taxes as a business owner can feel overwhelming and frustrating. Some may even argue that taxes are the most confusing part of running a small business. 

Yet, taxes are incredibly important for your business success. 

And if you know how to claim all of the deductions available to you, tax season can actually be something that you look forward to! 

Getting clear on your small business taxes starts with asking the right questions. 

In this blog post, we’ll go over some of the most common business tax questions and answers. Grab a coffee and let’s get started. 

Common Tax Questions Small Business Owners Have: A Roundup

What Business Expenses Are Deductible?

A tax deduction is a tax write-off allowed by the IRS for the purpose of lowering your taxable income.

To qualify for a tax deduction, your business expense must be “ordinary” and “necessary” to the operation of your business entity. 

In other words, business expenses that are essential to your regular business operations can qualify to be tax write-offs. 

Some popular deductible business expenses include: 

• Marketing and advertising, including social media and website costs 

• Business travel to conferences, educational seminars, networking events, and the like 

• Legal and professional services, such as a lawyer or accountant

• Bank fees

• Compensation paid to employees and contractors

• Home office expenses

…and more! 

Before you file your taxes, it’s important to know what deductions you qualify for so you can maximize your tax return. 

Is My Home Office/Workspace a Deductible Business Expense? 

Yes, and it’s something you should definitely consider taking advantage of if you work from home. 

If you use a part of your home exclusively and regularly for conducting business, you can qualify for the home office deduction and write-off expenses such as mortgage interest, utilities, insurance, depreciation, and maintenance. 

Both homeowners and renters qualify for the home office deduction. However, you can’t use it for hotels or temporary lodging such as an Airbnb. 

Is my Bookkeeper a Deductible Business Expense? 

Absolutely. Legal and professional services, including bookkeeping, are deductible business expenses. 

Working with a tax professional is one of the best ways to make sure you’re filing your taxes correctly and avoid any issues with the IRS. 

It is also a great way to make sure you are taking advantage of all the tax deductions available to you. 

→ Looking for a bookkeeper to help you navigate your business numbers? Desi Tax offers virtual bookkeeping and tax services for small businesses and entrepreneurs. 

Do I Need an EIN to File Business Taxes?

Yes. An EIN — or an Employer Identification Number — is basically like a Social Security Number for your business that the IRS uses for tax purposes. 

If your business entity is registered as an LLC, S-corp, or C-corp, you will need your EIN to file your taxes. 

If your business is a sole proprietorship and you don’t have any employees or contractors, you can use your SSN instead.

If you don’t have an EIN yet, you can get one online. 

Can I Use My Business Bank Account for Personal Expenses? 

This is one of the most common small business tax questions that CEOs and entrepreneurs have. 

While there is nothing illegal about using your business revenue to cover personal expenses, such as streaming service subscriptions or gym memberships, it is a poor business practice. 

Mixing your personal expenses and business finances can lead to a lot of confusion and frustration once tax time rolls around. Ultimately, you are creating more problems for the future you. 

It’s also important to remember that personal expenses are not tax-deductible, even if you pay them from your business account. 

Including personal expenses in your business costs can be seen as tax fraud. 

What Tax Forms Do I Need to Fill Out for My Business? 

It depends on what type of business entity you’re operating. 

If you’re running a sole proprietorship or a single-member LLC, you need to fill out a Schedule C on your Form 1040. Form 1040 is the income tax form you use to file your individual taxes. 

If your business is a multi-member LLC, S-corp, or C-corp you need to fill out a separate business tax form. Use Form 1120 for C-corp, Form 1120S for S-corp, and Form 1065 for multi-member LLC. 

Navigating tax forms can be challenging, but working with a tax professional is a great way to make sure you’re fulfilling your tax obligations correctly. 

What Is the Form 1099-NEC? Do I Need to Issue One? 

Form 1099-NEC is an income form that businesses have to issue to contractors and freelancers that perform work for them. 

Any contractor or freelancer whom you paid $600 or more for their service must be issued a 1099-NEC. 

That includes designers, copywriters, social media managers, and any other creative entrepreneurs you’ve collaborated with during the tax year. 

Issuing a 1099-NEC can feel like a hassle, but it’s an important part of staying in compliance with the law when running your small business. 

Previously, business owners had to issue a Form 1099-MISC to freelancers and contractors. Starting with the 2020 tax year, they now have to issue a 1099-NEC. 

Form 1099-MISC is still used, but to report miscellaneous income such as rent or payments to an attorney. 

What Is the Best Way to Prepare My Business for Tax Season?

The best way to ensure success during tax season is to prepare in advance. 

Unless you want to spend the day before the tax deadline frantically Googling “how to file taxes as a small business owner”...

…it’s important to keep your books organized throughout the year and know what you need to do ahead of time. 

There are multiple software programs available to keep track of your revenue and expenses, such as QuickBooks(my favorite!) and Xero. 

These tools can be extremely helpful, but they are meant to be used together with a human being who has a solid understanding of how to organize your books and do taxes. 

Desi Tax offers bookkeeping and tax services so you can use your financial data to make smart business decisions, reclaim your time, and make your tax season stress-free. 

Whether you want to build a solid financial foundation for your business or keep up with fast growth, you will benefit from organized tax preparation and bookkeeping. 

Learn more about our services here!