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The word ‘tax’ has a strange effect on people. Some find it boring; others find it confusing, and many find it scary.

Yet knowing the basics of tax is essential for your business to run smoothly and efficiently and be fully compliant. As a business owner, it’s your responsibility to ensure that proper books and records are kept, that your business is tax compliant, and that tax returns are completed. Failure to do so can result in serious consequences.

There is a lot to understand, but the team at FMA, CPA are seasoned tax professionals and are here to help. Let’s get to know the basics of tax efficiency. +We’ll start with common terms like gross income, deductions, and taxable income, then look at how taxes are calculated.

Common tax terms

1. Your gross income means your wages, interest, dividends, business income, prizes, awards, gain from the sale of stock or property, etc. In other words, gross income is all income from whatever source derived, and it includes amounts realized in any form whether money, property, or services, unless provided by law. A good rule of thumb is that everything is taxable unless the law states that it’s not. Some good examples of things not taxable include gifts and inheritance, scholarships, life insurance proceeds, and most disability income.
2. Deductions refer to business expenses/ deductions, and personal deductions such as state income taxes, mortgage interest, charitable contributions, student loan interest, etc.
3. Your taxable income is what your tax is calculated on, so it’s your gross income minus all of the deductions allowed. This is the number that your tax liability is calculated on.

So, how are taxes calculated?

Here in the US, we’ve got what’s called a progressive individual tax system, which means that all income is not taxed at the same rate. Higher levels of income are taxed at a higher rate, and lower levels of income are taxed at a lower rate.

There are tax brackets, and any income within this bracket is taxed at a particular rate. You’ve got your ‘marginal tax rate’ which is the rate that your next $1 will be taxed, and you’ve got your ‘effective tax rate’ which is the overall tax rate you’re paying on all of your income.

Remember, tax rates differ for ‘individuals’ and those who are ‘married filing jointly’. Also worth noting is that state income tax differs in every state, with some having a progressive system, others a flat tax, and a few with no state income tax.

What other tax should you know about?

1. You’ll pay capital gains tax on the sale of investments and real estate, and this is taxed at lower preferential rates.
2. Single people earning over $125,000 or married people earning $250,000 will have an additional 3.8% tax applied to all investment income. This is called net investment tax.
3. Self-employment tax is where social security or Medicare taxes are applied to all self-employed income or profits.

Tax efficiency

Tax planning focuses on ensuring that you pay no more than your fair share of taxes. The goal of tax planning is to increase tax efficiency and reduce the overall effective tax rate paid on the business’s gross income.

So, if optimizing your business income, maximizing deductions and credits, and minimizing self-employment taxes sound good, we’re happy to help you achieve this.

As experts in business tax management, accountancy services, financial statement preparation, and financial advice, we can guide you. We’ll be proud to be your business advisors. We can answer all of your questions and help you to unlock the potential of your business.

We serve the Tampa Bay Area, and our clients know that they’re in good hands to manage all of their business tax needs and more. Let’s start with a free strategy session.