Small Business Taxes: Expenses and Paperwork Explained

Small business taxes can be complicated. From ensuring you’re paying the right amount as a small business owner to taking all potential deductions to minimize the cost, it’s no wonder only 1 in 3 small business owners feels prepared for tax season.

Despite the complexities, it’s important to know the rules in place and the opportunities available when it comes to paying your business tax. 

Are there tax loopholes for small businesses?

Understandably, as a small business owner, you’re likely going to want to minimize the business tax you’re handing over to the IRS. Taxes can get expensive, and that’s even more true if you aren’t aware of potential deductions and expenses that can ease the burden.

However, although there are many small business tax credits available to you (dependent on your location), you shouldn’t look for loopholes. 

The term "loophole" might suggest a clever way to reduce your tax burden, it often refers to gray areas in the tax code that might not be intended for the average taxpayer's benefit. Exploiting these loopholes can be risky. Although they might offer short-term savings, they can also attract unwanted attention from the IRS and trigger a small business audit.

Audits are time-consuming and stressful and could result in penalties, interest on unpaid taxes, and, in some cases, legal consequences. The cost of dealing with an audit can quickly outweigh any savings you might have gained from exploiting a loophole.

A professional accountant won’t rely on exploring these gray areas but will focus on tax credits that can give you guaranteed savings. If the IRS ever audits you in this case, you have the receipts to prove you were entitled to these savings. 

4 Steps to prepare for small business taxes. 

The best way to avoid a surprise when it comes to tax season is to make sure you’re prepared in advance. Businesses also generally have to make estimated tax payments. This means they pay the estimated amount quarterly, rather than the full amount upfront, which can help prevent a nasty shock at the end of the year.

1. Account for your business structure.

Your tax obligation is dependent on many things, including your business structure. Below are the most common business structures and the tax implications associated with them.

• Sole Proprietorship: A sole proprietorship is owned by one single person who is responsible for all of the business’ debts. There’s no legal separation between personal and business assets and is the easiest and most inexpensive to set up. This might be, for example, a dog walker or dog sitter who does everything on their own.
• Limited Liability Company: An LLC is a hybrid model that combines the flexibility of a partnership with the protection of being a corporation. LLCs can have one or multiple members, and there is some flexibility in how they can be taxed—as a sole proprietorship, partnership, or corporation. Many pet sitters who work out of their own homes or do drop-ins will set up an LLC for protection.
• Limited Liability Partnership: Law firms and accounting firms typically use this model of business. It gives partners limited liabilities and ensures they aren’t responsible for the actions of other members of the business. These are typically slightly larger companies and involve multiple people.
• C-Corporation: A C-corporation is an entity separate from its owners, giving them a high level of liability protection. They are subject to corporate income tax and profits can be taxed again when distributed to shareholders as dividends. This structure is more complex and also comes with higher taxes. Larger dog boarding facilities and grooming chains might fall under this category. 
• S-Corporation: An S-Corporation is a special type of corporation that chooses to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. This means that income is taxed at the individual level, avoiding the double taxation faced by C-Corps, but it can be complex to set up and has very specific requirements. 

If you’re in the beginning phases and are unsure which business structure you should set up, speak with your accountant as they will be able to advise which one is best for your financial situation. 

2. Gather paperwork and tax documents.

When it’s time to pay your small business taxes, gather the paperwork and documents you have collected throughout the year to perform the accounting. These include:

• Gross receipts: This is the total revenue a business earns from its operations before any deductions or expenses are accounted for. This includes income from pet grooming, boarding, sales of pet supplies, and any other services or products offered.
• Purchases: Make sure any purchases you make for the business have records kept as well, whether that’s a one-time purchase or constant supplies, such as cleaning items or pet food.
• Expenses: Expenses are the ongoing costs required to run the pet business. These include rent, utilities, salaries, and other operational costs. Unlike purchases (which are generally for inventory), expenses are related to the day-to-day operation of the business. Having software, like PetExec, to help track this can be key in making sure you don’t miss anything.
• Travel and transportation: Keep a note of any travel and transportation you do in relation to the business—for example, taking a dog to the vet or doing a drop-off for an owner. Gas receipts should also be kept for this, as this will likely be the main expense. 
• Assets: Assets are anything the business has that will outlive the tax year, such as property, equipment, or a vehicle. Assets aren’t fully deducted during the year of purchase but are depreciated over time according to tax rules.
• Employment taxes: Employment taxes are the taxes a business has to pay related to its employees. For a pet business, this might include social security, medicare taxes, federal and state unemployment taxes, and any local payroll employment taxes.

3. Inventory your deductions. 

Now you have all your paperwork in one place, you can start categorizing and organizing them to make sure you don’t miss any potential deductions that can help lower your taxes. The typical categories that deductions fall into include:

• Office expenses: If your business has a physical address, this will include rent and utilities, but it also includes supplies and equipment. 
• Employee wages: Salaries and benefits are included here, but also payroll and employment taxes.
• Vehicle expenses: If you use a vehicle for your business, such as mobile grooming or pet transport, make sure you keep track of vehicle expenses for business taxes. This will include mileage, fuel, repairs, and insurance.
• Travel expenses: Make sure to consider travel expenses outside of the vehicle itself, such as attending conferences to network and traveling to client meetings. 
• Advertising and marketing: Keep track of all expenses acquired through marketing, whether that’s paid ads and billboards, a website subscription fee, any social media fees, and more. 
• Insurance: Insurance may include business liability, property, and health insurance if you’re self-employed. 
• Professional fees: Small business owners usually consult other professionals to help, such as accountants, lawyers, etc. Make sure to track the fees incurred from using their services. 
• Bad debts: Bad debts are considered unrecoverable business expenses and written off as a loss. This could include unpaid invoices from clients. 

4. Consider small business tax credits.

Tax credits are available through both federal taxes and state and local taxes. There are deductions available to help small businesses and often change every year, so it’s important to stay up to date with the latest ones for your business taxes. Some common ones include the following:

Research and Development (R&D).

The Research and Development Tax Credit is designed to encourage businesses to invest in growing and technological advancement that’s beneficial to the industry overall. Companies are allowed to offset a portion of R&D expenditures against their tax liabilities to reduce the cost of that research.

Some activities eligible for this on a federal income tax form might include:

• Developing new products, such as a new dog shampoo or pet toy
• Improving existing technologies, whether that’s grooming equipment or software
• Enhancing processes within the pet business

The credit varies by jurisdiction and it does often require extensive documentation of the R&D, which is why it’s important to keep records as you go. 

Work Opportunity Tax Credit (WOTC).

The Work Opportunity Tax Credit is based on federal income tax and is designed to encourage businesses to hire people who may otherwise face significant barriers to becoming employed. Such groups might include:

• Veterans
• Long-term unemployed individuals
• Those recovering from government assistance

The business would then receive a tax credit that can significantly reduce their tax liability while promoting inclusion. 

Child and Dependent Care Credit.

This tax credit is designed to relieve the burden on parents or guardians who may have to pay for childcare while they work on their business. 

The credit covers a percentage of qualifying expenses, such as daycare, after-school programs, or care for a dependent with disabilities, up to certain limits. By reducing the financial burden of caregiving costs, the Child and Dependent Care Credit can help pet business owners and employees maintain a better work-life balance. It can also enhance their ability to stay engaged and productive in their roles.

Small Business Health Care Tax Credit.

This credit is a federal incentive designed to make health insurance more affordable for small businesses. It offers a credit to eligible small businesses that provide health insurance to their employees, helping offset the cost of premiums. 

The business must have under 25 employees to qualify, and they must contribute a significant amount to employee premiums.

Integrate your tax software with PetExec.

Running a small business means a lot to think about. That’s why, if you’re planning to run a pet business, you should have some software that can take some of the hard work out of it.

PetExec’s cloud-based software is built to relieve the burden. With accounting integration to make sure we’re keeping track of all the numbers, paperless contracts, technical support, marketing help, and more, we do as much as we can so you can put thought into everything else without sweating keeping track of records. 

Contact us today with questions, or check out our free demo to see if our software is right for your business! 

Commonly asked questions.

How much can a small business make before paying taxes?

A small business can make up to $400 before paying taxes. It’s important to check this every year, as tax laws are subject to change and this amount may go up or down. If you meet any other filing requirements, you may still have to file an annual income tax return, you just won’t owe any money from the amount your small business has made. 

How are small businesses taxed in the US?

A small business is usually taxed depending on its business structure. Sole proprietorships are taxed very differently from corporations, for example. To know exactly how your business is going to be taxed, it’s important to consider the structure and speak to an accountant who can work out your exact business tax.