March 1, 2025

Small Business Tax FAQs: 2024-2025 Guide

- What are some key tax changes I should be aware of for the 2024 and 2025 tax years?

- For 2024, the maximum net self-employment earnings subject to the social security part of the self-employment tax is $168,600. The bonus depreciation deduction limit decreased from 80% to 60%. The standard mileage rate increased to 67 cents per mile for business use. For 2025, the maximum net self-employment earnings subject to social security tax increases to $176,100 and the standard mileage rate rises to 70 cents per mile. It’s also worth noting that the 100% deduction for business meal expenses has reverted back to the previous 50% allowable deduction starting January 1, 2023.

- What are the different types of Taxpayer Identification Numbers (TINs), and when should each be used?

- There are three main types of TINs: Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), and Employer Identification Number (EIN). An SSN is generally used by individuals and should be put on individual income tax forms. An ITIN is issued by the IRS to nonresident and resident aliens who don’t qualify for an SSN; it is for tax use only. An EIN is required if you pay wages to one or more employees or if you file pension or excise tax returns.

- When am I required to file an income tax return as a self-employed individual?

- You must file an income tax return for 2024 if your net earnings from self-employment were $400 or more. Even if your net earnings were less than $400, you might still need to file if you meet other filing requirements outlined in the Form 1040 instructions. You will generally file Schedule C with Form 1040 or 1040-SR to report profit or loss from your business.

- SE tax is essentially social security and Medicare taxes for individuals who work for themselves. It consists of 12.4% for social security (up to the maximum earnings limit) and 2.9% for Medicare, totaling 15.3%. If your net earnings from self-employment are $400 or more, you must pay SE tax. You can deduct one-half of your SE tax as an adjustment to income on Schedule 1 (Form 1040).

- As a small business owner, what information returns am I likely to encounter, and what are the consequences of not filing correctly?

- You’ll likely deal with Form 1099-MISC for payments like rent or royalties, Form 1099-NEC for payments to independent contractors, and Form W-2 for payments to employees. Failing to file these forms correctly can result in penalties for not filing on time, not including required information, or reporting incorrect information. However, penalties may be waived if the failure was due to reasonable cause and not willful neglect.

- What is the difference between the cash and accrual methods of accounting, and how do I choose which one to use?

- Under the cash method, you report income when you actually or constructively receive it and deduct expenses when you pay them. Under the accrual method, you report income when earned, even if not yet received, and deduct expenses when incurred, regardless of when they are paid. Most individuals and sole proprietors with no inventory use the cash method because it is simpler, but you must generally use the accrual method if an inventory is necessary to account for your income unless you are a small business taxpayer.

- What are the rules regarding inventories, and when am I required to keep them?

- Generally, if the production, purchase, or sale of merchandise is an income-producing factor in your business, you must keep an inventory and use an accrual method for purchases and sales of merchandise. However, small business taxpayers (those with average annual gross receipts of $30 million or less for the 3 prior tax years and who are not tax shelters) can choose not to keep an inventory, provided their method of accounting for inventory clearly reflects income.

- When you dispose of business property, you may have a gain or loss that you must report on your tax return. Common dispositions include selling property, exchanging property, or even abandoning it. Nontaxable exchanges, like like-kind exchanges, exist where gain may not be immediately recognized. When selling a business, each asset is generally treated as being sold separately for determining the treatment of gain or loss, and both the buyer and seller must report the allocation of the sales price among the business assets on Form 8594.