Alaskan Small Business Taxes: The Basics

If you are thinking of starting your own small business in the northernmost state or already own a small business there, here is what you need to know about taxes.

Overview

Small Business Taxes in Alaska

Whether you're a seasonal fisher or a small shop owner, if you live in Alaska, taxes are constantly top of mind. This guide steers you through the essential parts: what taxes might apply, how to take common deductions, fundamental filing steps and practical record-keeping advice. Consider it a roadmap for staying out of trouble — and keeping more of your money.

Understanding the Alaska tax landscape

Alaska has an unusual system of tax. For small business owners, what you need to know about is: some statewide taxes that affect businesses, local taxes that are different in each municipality and the continued burden of federal tax rules. Because local jurisdictions can have their own sales taxes and fees, it matters where your business is based or the location in which you sell goods.

Taxes that could impact your small business

Corporate and business taxes: State-level corporate or business taxes apply based on your type of business and taxable income. Entities that file and are taxed as corporations are subject to corporate tax rules, while pass-through entities generally pass income through to the owners for federal and, in some cases, state purposes.

Sales and use taxes: State sales tax laws vary, but in many communities local sales taxes are added to sales of goods and in some cases services. All businesses that sell taxable merchandise or provide taxable services in more than one location must be registered and collect at the proper local rate of tax where such sale is made.

Payroll taxes: Employers themselves are required to withhold federal income tax and payroll taxes for Social Security and Medicare. Employers must also pay their state unemployment insurance and whatever local payroll taxes are required.

Other assessments and excise taxes: Companies in some industries pay industry-specific taxes or licensing fees. Run any excise or license tax responsibilities if you work in tourism, fishing, construction, or fuel sales.

Identifying applicable tax rates

There may be multiple tax rates for different types of taxes and locations. In the case of sales tax, local rates are determined by municipalities and may change, so keep an up-to-date list of what they are where you operate or ship goods. Regarding business income taxes, find out if your company’s structure exposes it to state business tax and even which brackets or rates will be implemented. If in doubt, register with the relevant state revenue office and seek advice for your industry and form of entity.

Allowable deductions and credits that lower tax liability

One of the most effective methods to slash tax bills is understanding what deductions are allowed. Examples of common deductible items for small businesses are:

• Ordinary and necessary business expenses: Rent, utilities, supplies, professional services and insurance premiums that contribute to running a business.
• Employee wages and benefits: Wages, employer-paid payroll taxes, retirement plan contributions and various benefits may be deductible.
• Home office deduction: If you use a part of your home regularly and exclusively for business, you can take a proportionate deduction on mortgage interest, utilities and depreciation. Maintain well documented and measured utilization of the space.
• Vehicle and travel expenses: Keep a record of business miles and either deduct the standard mileage rate or actual vehicle costs for business trips. Maintain logs of date, reason and mileages traveled.
• Depreciation and section-type deductions: Property, such as equipment, machinery and other property used in the business may be depreciated over time or expensed all at once in the year of purchase under certain tax code sections. Track purchase dates and usage.
• Startup, and organizational costs: Many new businesses are able to either amortize or deduct some of the startup costs in their first year.

Recordkeeping best practices

Well-organized records help you prepare your tax return, and they make it easier to file even if there are flaws. And should the I.R.S. ever audit you, good records will be invaluable in supporting whatever claims you made on your taxes. Hang on to receipts, invoices, bank statements, payroll records and logs for mileage driven and home office use. Maintain a clear filing system — digital or by hand — and balance accounts monthly. Keep a record as long as the tax law requires (which typically is several years).

Filing steps and timing

• Early registration: Register your business with appropriate state and local authorities to secure tax IDs and permits before starting to collect or remit taxes.
• Separate accounts: Keep a separate business bank account and credit card to better track revenue and deductible expenses.
• Estimate and pay tax: Some businesses must make estimated tax payments throughout the year to avoid penalties. You project income and send in estimated payments on a schedule.
• Payroll compliance: If you have employees, establish and withhold and deposit the necessary payroll taxes on time. File payroll tax returns and provide year end statements as necessary.
• Annual returns: File annual business returns as required by their deadlines. Meet appropriate filing deadlines, or request extensions when due, if your business pays corporate-level tax or is required to file an informational return for a pass-through entity.

Common pitfalls to avoid

Commingle personal and business expenses. Stay separate and avoid any disallowed deductions headaches at tax time.

Failure to comply with local sales tax requirements in selling across multiple jurisdictions. Be sure to check local rates and registration requirements.

Inadequate records for deductions such as mileage, home office or travel. The onus of proof is upon the taxpayer.

Real world advice to legally reduce taxes

Structure purchases and asset acquisitions to achieve current-year deductions versus long-term depreciation based on cash flow and tax planning strategies.

Explore retirement plans to get tax-favored savings and deductible employer contributions for small business owners and employees.

Periodically review entity structure. Some forms of entities may provide for more favorable tax treatment depending on the revenue and profit distribution.

When to seek professional help

Tax laws fluctuate, and interactions between federal, state and local taxes can be complicated. If your business operates in more than one jurisdiction, has a large work force or is leaning toward big investments, contact an experienced tax adviser to craft and implement strategy compliant with the law.

Next steps

Here’s the first three things to put on your checklist: register for local tax accounts, set up bookkeeping, estimate quarterly payments and document deductible expenses. Keep learning: visit small business workshops, read legislation manuals and review local municipal tax ordinances pertaining to your business.

This guide will explain the specifics of dealing with small business taxes in Alaska. While maintaining a record of everything, regularly reviewing all considerations related to local tax liabilities and proactive strategic planning against them can mitigate tax risks and do wonders for the growth of your business. Keep your house in order and informed, and re-evaluate your tax position every year.