The amount a small business can make without paying taxes depends on various factors including its legal structure, expenses, deductions, and credits.
Here are some general guidelines for different types of small businesses in the United States…
- Sole Proprietorship – As a sole proprietor, your business income is typically reported on your personal tax return (Form 1040). If your net income (total revenue minus allowable deductions) is below the threshold for owing federal income tax after deductions and credits, you may not owe any taxes. For example, in 2021, the standard deduction for a single filer was $12,550. So, if your net income is less than this amount, you might not owe federal income tax.
- Partnership – Similar to sole proprietorships, partnerships typically pass through income to the partners who report it on their personal tax returns. Each partner’s share of the partnership’s income is taxed at their individual tax rates. If the partners’ taxable income is low enough after deductions and credits, they may not owe federal income tax.
- Limited Liability Company (LLC) – Depending on how the LLC is taxed, it can be treated as a sole proprietorship, partnership, S corporation, or C corporation for tax purposes. Like sole proprietorships and partnerships, income from LLCs taxed as pass-through entities flows through to the owners’ personal tax returns. LLCs taxed as corporations are subject to corporate tax rates.
- S Corporation – S corporations are pass-through entities, meaning income passes through to the shareholders’ personal tax returns. Similar to partnerships and sole proprietorships, if the shareholders’ taxable income is low enough after deductions and credits, they may not owe federal income tax.
- C Corporation – C corporations are taxed as separate entities, and the corporation itself pays taxes on its profits. However, there are circumstances where small C corporations might not owe federal income tax. For example, if the corporation has deductible expenses that offset its income, it might not have a tax liability.
It’s essential to consult with a tax professional or accountant who can provide personalized advice based on your specific business situation and the current tax laws in your jurisdiction. Tax laws and regulations can change, so it’s crucial to stay updated on any updates that may affect your tax liability.