A lot of advantages accrue from running a small business; also, there are some potential drawbacks associated with the operation of a small business if it is not efficiently and effectively managed. Small business tax planning is an essential element that requires cautious attention. It entails a year-round procedure with thorough details being well planned before-hand, in order to achieve profit maximization while keeping taxes low.  

Each individual taxpayer and small business owner is free to select the method by which a financial transaction is achieved, to the end that the outcome will be the lowest lawfully admissible tax liability as possible. Put in other way, tax averting could be completely lawful while tax evasion is not. One of the ways of achieving low taxes as possible is to understand the basics of tax planning for small business, being supported by a Small Business Accounting System.

Small business tax planning beings in the course of entity selection state, prior to your business formation. In essence, your future business tax implications will be largely influenced by the business structure you choose. Whichever one you set up; an S Corporation, LLC or C Corporation, a business structure will fundamentally be the basis for the tax amount on all future income. In the course of planning small business tax, deductions and write-offs admissible for the purposes of tax should be understood and implemented. The target should be to make the most of what is deductible from the taxable income, as well as what you can write off, by understanding what is regarded as deductible expenses. This is very essential when planning tax for a small business, since a good number of small business owners would frequently ask which expenses are deductible as business expenses.  

The Internal Code Revenue Code Section 162 provides the answer that has been tested and has been the basis for many court decisions. “In general, there shall be allowed as deduction, al ordinary as well as necessary expenditure paid or incurred during the taxable year, in carrying in performing of any trade or business”. Note two important key words in this section 162 of the Internal Revenue Code; “ordinary” and “necessary”, these words assume great significance. In its simplest term, any expenditure incurred by the small business which are ordinary and necessary to perform the particular business, are completely deductible from the gross income.

Some instances of deductible expenses:

1. Auto expenses – use of personal car for the purpose of business and business vehicles
2. Expenses associated with business such as advertising, office supplies, utilities and repairs
3. Business entertainment – 50 percent of the cost of entertaining current and prospective customers