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How To Be A Small Business Tax Ninja

What is A Tax Resale Certificate?

You must understand that tax resale certificates can also be used on items that will be resold. Office supplies, such as new computers for your employees, would not fall under the category of retail.  It would be considered fraud not to pay sales tax on these items.

If this is confusing for you, just think of tax resale certificates as state tax exemption certificates.  Some states call them exemption certificates or reseller’s permits.

Is Your Business a Pass-Through Entity?

A pass-through entity is when the tax liability of the business asses through to the owner.

Pass-through entities include:

  • Sole Proprietorships
  • Limited Liability Companies
  • S Corporations

A business that has not filed any paperwork is automatically considered a sole proprietorship by the Internal Revenue Service.

If you are a pass-through entity then you could owe less in taxes. The Tax Cuts and Jobs Act allows a 20 percent tax deduction on qualified business income from pass-through businesses. Generally, the deduction is available to eligible taxpayers whose taxable income is below $315,000 for joint returns and $157,500 for individual filers, according to the IRS. Some types of pass-through businesses may not qualify for this deduction: The IRS regulations detail the limitations.

If your business is a pass-through entity, then the taxable business income must be reported with your personal tax return. This means the amount you owe will be determined by your tax bracket. For 2020, personal tax brackets range from 10 percent (for individuals earning up to $9,875 and joint filers earning up to $19,750) to 37 percent for individuals earning more than $518,400 and joint filers earning more than $622,050.

How Do I Know If I Need To Pay Sales Tax In A Given State?

To establish whether or not a state can impose a sales tax upon your business there first needs to be nexus. Nexus relating to state sales tax is established by a connection between the state and your business. How this connection is defined has been subject to fairly recent changes that reflect changes in the way business is conducted in modern times.

Traditionally, the nexus has been established by the business having a physical presence in the state. However, due to the explosion of e-commerce, physical presence within a state is no longer a requirement for sales tax nexus. In the case of South Dakota v. Wayfair, the courts eliminated physical presence as the major requirement for creating nexus. It still should be noted that physical presence is considered an important requirement to allow a state to collect sales tax and is still one of the first considerations for sales tax.

What Happens If I Do Most Of My Business In A State That I Am Not Incorporated?

If you primarily do business in a state that you are not incorporated in, make sure you apply for a Foreign Qualification (also known in some states as a Certificate of Registration or Certificate of Authority). This is the process of registering your company, which is considered domestic to the state in which it was originally formed and foreign to all other states, as a foreign entity in the states in which it operates. The retailer is then able to legally conduct business outside the state in which the company was originally formed and therefore should be able to apply for a tax resale certificate. 

Remember To Verify Any Tax Resale Certificate Presented To You

In the first part of our series, we mentioned that a vendor can refuse a tax resale certificate. This is because the vendor will be the one liable to the state government should anything be remiss. That is why you should always take the following steps to assure that anything presented to you is valid.

  • Make certain that the certificate is properly filled out and signed by the business owner
  • You should be able to verify the certificate online by using the certificate
  • You should also be able to verify online if the certificate has expired
  • Be aware of purchase that seems suspicious and does not relate to the customer’s business in a logical manner
  • You must keep the certificate on file for at least 5 years in case of a tax audit.

Remember The Deductions

Read our helpful article on deductions that your small business can not afford to miss.  It includes the following:

  • Travel by airplane, train, bus, or car between your home and your business destination. (If you’re provided with a ticket or you’re riding free as a result of a frequent traveler or similar program, your cost is zero.)
  • Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel, and the work location, and from one customer to another, or from one place of business to another.
  • Shipping of baggage, and sample or display material between your regular and temporary work locations.
  • Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can deduct only the business-use portion for the expenses.
  • Meals and lodging.
  • Dry cleaning and laundry.
  • Business calls while on your business trip. (This includes business communications by fax machine or other communication devices.)
  • Tips you pay for services related to any of these expenses.
  • Other similar ordinary and necessary expenses related to your business travel. (These expenses might include transportation to and from a business meal, public stenographer’s fees, computer rental fees, and operating and maintaining a house trailer.)
  • Many apps have come on the market that makes it exceptionally easy to scan and track receipts for travel-related expenses. Some of these apps also automatically categorize expenses which is very nice for accurate bookkeeping.