Small business is a general term for any business with less than a hundred employees. Small businesses are normally privately-owned companies, partnerships, or sole ownerships that typically have less than a thousand employees and/or lower annual revenue than a normal-sized corporation or business. A privately-owned small business has more flexibility in choosing partners and business managers than a publicly-held business because of the absence of a third party with an interest in the company’s success. However, even a small privately-owned business can fall victim to financial hardship at some point, so it is always advisable to keep your small business plans in writing and to execute them as outlined. Here are six steps to help you get started on the right track.
There are two basic definitions for the private small business: owned by the owner or by an associate, and privately held business. The first describes your company, as owned by you. The second describes your business as privately held, which means that your company is privately funded and operated. The IRS breaks down the first definition further into two classes: self-owned and owned by an associate. Self-owned refers to a situation where your company has more equity invested in the company than you do; the IRS calls this an investment in the business.
Private business ownership usually refers to investment opportunities via profit sharing or rewards programs, or investment through licensing agreements, acquisitions, or government contract work. These are often described as incentive pay programs, and they must be presented to the IRS as a part of your small business income tax return. There are many incentives available to small business owners, including depreciation expenses, accelerated depreciation, and IRS lease payments. As stated in IRS Publication 936, “the use of such incentives may result in increased income or reduced income, interests, and losses and are not tax-deductible”, so the incentive amount must be calculated and presented to the IRS along with your income tax return. It is very important that you work closely with your CPA during the preparation of your IRS Schedule C.
The third category is government contract work. This encompasses all items that are performed under a contract that is binding both the United States and the specific customer. These can include anything from purchasing aircraft, trucks, buildings, information technology equipment, rail cars, and computer technology, to complex manufacturing processes. Government contract work must be presented to the IRS for its classification as small business income tax incentives.
The fourth category is considered small businesses that have fewer than 500 employees. This could include courier services, retail sales, online sales and marketing, landscaping companies, and certain types of temporary staffing agencies. If your business meets these criteria, you may also qualify for the S corporation tax status, which allows you to reap the benefits of tax benefits without actually paying taxes on them at the individual level.
The fifth and final category is the national networks. There are many different subcategories under this category including professional and business associations, civic organizations, professional associations, educational institutions, charities, and various national agencies. Your local, state, and federal governments can be considered as national network businesses depending on their area of specialization. For example, the Department of Education, which handles everything from student loans to tax forms to postage stamps, would be considered a network business based on their various activities.
Now that you have an understanding of the five categories that determine whether or not your business qualifies as a small business, it is time to learn about the IRS definition of small businesses for tax purposes. The five categories are described in the table below, along with an explanation of how they apply to your situation. You should use these standards to determine if you qualify for any of the tax deductions mentioned above, and if so, which one will help you most.
If you own and manage a firm size of five, your personal liability for income tax will be limited to your contract employees (which are considered contractors) and your small business investment (which is considered a partnership). The definition of small businesses does not apply to S corporations. Firms of one to ten employees are also generally exempt from income tax. However, they are taxed as if they employed one employee.