Tax day is right around the corner… By now your business taxes should be completed. Congratulations! But, before you celebrate, we still have a bit more work to do on your individual taxes. As you’ll remember, if your business is an S Corp, partnership, single-member LLC, or sole proprietorship, your business’ taxes “passed through” to you. This means we now have to deal with them on your individual taxes at your personal rate instead of your business rate.
If you’re a permanent resident or citizen of the United States, all the money you make (also known as your “global income”) is taxed. But, that doesn’t necessarily mean you’ll owe tax on every penny! Your business taxes were a preview, but your individual taxes are the main event. Here’s where you have your opportunity to show the IRS why you shouldn’t owe taxes on all of it.
How Your Business Fits Into Your Individual Taxes
When your business is a “pass-through entity,” all of the responsibility for profits and losses get passed on to you as the owner, regardless of how much you see it reflected in your personal accounts. You already know your Schedule C and K-1 forms, interest forms, and 1099s all help show the financial picture to the IRS, along with documents like W-2s. And, just as your business’ profits will be shown, so will your business’ losses or deductions.
Because your business’ taxes “passed through” to you, you’ll claim both your personal and business deductions from the total of your income when you file. This gives the IRS a more complete view of your tax profile. And, in many cases, this can work to your benefit because you increase your eligibility for deductions when everything is viewed together!
But Wait, How Much Will I Owe?
If you’re confused, don’t worry! Monarch CPA is here to break it down for you. But, in this case, there aren’t any clear answers because… it depends! Let us explain.
Let’s say you have three different business owners who have pass-through entities, all of which made the same amount of money. Yet it’s completely realistic to expect all three would owe different amounts when their individual taxes are due.
Owner 1: While their business has high profits, they also have high expenses to keep the business running. Their individual taxes also reflect they are filing as “head of household” and have one dependent. The IRS will take all of that into account when processing their return and claimed deductions.
Owner 2: This business’ profits aren’t offset by a lot of expenses. It doesn’t require much money to run. They are filing as a single person but they’ve had a lot of medical and educational expenses over the past year. Their tax obligation will be tailored to their unique situation.
Owner 3: Finally, this business’ losses are significant compared to their profits. However, this year they are filing jointly with their new spouse who has a high income. As a combined household, they have six children. They also just bought a new house they are in the process of renovating. To pay the least in taxes, they’ll need to include as much relevant information as possible.
Clearly, your taxable income will be determined by a lot of variables. And, yes, it can feel overwhelming when you try to do it on your own. Having a trusted CPA to guide you through the process is one of your most powerful tools for a stress-free tax season and more savings in your pocket!
Monarch CPA Has the Accounting for Your Individual Taxes Covered
One of the best things about having your business taxes and individual taxes done by Monarch CPA year in, year out is we’re already in the loop on your business finances. We’ll figure out the best deductions for your personal and business taxes, helping you keep as much of your hard-earned money as possible to live life to the fullest! Schedule a call with Monarch CPA today to make sure all your documents are ready for your individual taxes and find out which deductions you can claim!