What’s the Magic Number? Determining Small Business Status for Tax Purposes

by | Nov 9, 2022 | Bookkeeping & Accounting

From mom-and-pop shops to tech startups, small businesses are the backbone of the American economy. But what exactly qualifies as a “small business?”. When it comes to taxes, the answer isn’t always so clear. The good news is, we’re here to help clear things up. Read on to learn more about determining small business status for tax purposes in the United States.

Classification for Tax Purposes

The first thing to know is that there is no one-size-fits-all answer when it comes to classifying a business as small for tax purposes. That’s because the definition of a small business can vary depending on which tax code is being used.

For example, the Small Business Administration (SBA) defines a small business as “a firm that is independently owned and operated, is organized for profit, and is not dominant in its field.”

A business must fall below at least one of the SBA’s size thresholds in order to be considered small.

In general, these size standards are based on either the average annual receipts or the number of employees for a particular industry. For example, the size standard for businesses classified under NAICS code 541110 (Offices of Lawyers) is $7.5 million in annual receipts. This means that any business with annual receipts of $7.5 million or less is considered small for tax purposes in the United States.

However, the IRS has a different definition for small businesses that qualify for certain tax breaks. Under the IRS code, a small business is any business with less than $5 million in annual receipts.

So, what’s the magic number?

Unfortunately, there is no easy answer. The best way to determine whether your business qualifies as small for tax purposes is to consult with a tax professional or use the IRS’s Small Business Tax Center.

When it comes to taxes, there is no such thing as a one-size-fits-all solution. But with a little bit of research, you can figure out which category your business falls into. And once you know that, you can take advantage of all the tax benefits that come with being a small business owner in the United States!

There are a few other things to keep in mind when determining if your business is small for tax purposes. First, businesses can be small even if they do not have the organization of traditional corporations or partnerships. This includes sole proprietorships, limited liability companies (LLCs), and S corporations.

Second, businesses can be considered small even if they’re part of a larger organization. For example, let’s say your company has 500 employees. Only 20 work at the location where you provide your product or service. In this case, you would still be a small business for tax purposes because fewer than 500 employees work at your particular location.

Of course, this begs the question:

What if my business doesn’t fit neatly into either of these definitions?

Don’t worry, there’s still hope. The SBA offers a size standards tool that can help you determine whether your business qualifies as small based on its industry. Simply select your industry from the drop-down menu and enter your average number of employees or annual receipts (whichever is applicable). The tool will then let you know whether your business qualifies as small according to SBA standards. As an alternative, seek professional help.

Figuring out whether your business qualifies as small for tax purposes can be complicated. But don’t despair—the SBA’s size standards tool can help you get to the bottom of it. Once you know how your business stacks up, you can move forward. You will have confidence knowing that you’re taking advantage of all the tax breaks and incentives available to small businesses in the United States. If you still feel like you need additional information, our team of experts at Startup Tandem would be more than happy to help. Contact us today to learn more.

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