Tax Tips when You Start a Business
If you plan to start a new business, or you’ve just opened your doors, it is important for you to know your federal tax responsibilities. Here are five basic things to know as you get started.
- Type of Business. Early on, you will need to decide the type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form. This decision is critical, so get good tax advice and make sure to follow through on filing the right forms.
- Types of Taxes. The type of business you run usually determines the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax. Do your research or speak with your tax advisor about the details as soon as possible.
- Employer Identification Number. A business often needs to get a federal EIN for tax purposes. Check IRS.gov to find out whether you need this number. If you do, you can apply for an EIN online. But before you apply, make sure you know how you want the IRS to view the entity. You may need to check with your tax advisor in this area or have them handle the application because once obtained, it’s much more difficult to change the information.
- Recordkeeping. Keeping good financial records will help you when it’s time to file your business tax forms. They help track deductible expenses and support all the items you report on your tax return. Good records will also help you monitor your business’ progress and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses. There are many inexpensive accounting software programs that make the record keeping very simple and will even integrate directly with your online bank account.
- Accounting Method. Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and accrual method. Under the cash method, you normally report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them. This is true even if you receive the income or pay the expenses in a future year. Check with your tax advisor if you have questions here. Many accounting software programs will allow you to report either way but you’ll need to know which one to use for tax purposes.
The tax benefits of your own business are huge so make sure to check with your tax professional about those as well. Spend some time now to get things setup properly and get the upfront assistance you need. It will position you well for years to come.
Have more questions? Schedule your free tax consultation today by calling (480) 888-7111 or submit a web request here.