Starting a business can be an exciting and overwhelming endeavor. If you are ready to take the plunge and start out on your own, make sure you factor tax strategy into the planning phase. The last thing you need as you run your business is backwards work with tax troubles.
Some of the best tax help is right at your fingertips via the IRS website, irs.gov. Through its Publication 583, titled Starting a Business and Keeping Records, the IRS provides in-depth information on tax related questions that can be referenced 24 hours a day, 7 days a week by new business owners and start ups. As the leader of the original tax resolution agency who helps thousands of small business owners resolve their IRS tax issues, I do advocate tax problem prevention first and foremost.
Here are the seven basic topics to consider in Publication 583 that will start your business off right:
Type of Business – Business Structures – You will need to determine what type of business entity to establish. Common business structures for start-ups are: sole proprietorship, partnership, corporation, and S corporation and Limited Liability Company (LLC). Important: Legal and tax considerations enter into selecting a business structure, so it’s important to consult a tax professional prior to setting up your business should you have questions or concerns.
Type of Taxes – The business structure you choose will usually determine what taxes you pay and how you pay them. The following are the four general kinds of business taxes:
- Income tax
- Self-employment tax
- Employment taxes
- Excise taxes
Apply for an Employer Identification Number (EIN) – or Federal Tax Identification Number (FTIN) is how businesses are identified for tax purposes. Most businesses will need an EIN, and luckily, the process of getting one is simple by applying online. Note: the IRS advises you check your state’s regulations as you may also need a state number or charter.
Choose a Tax Year
You will need to determine your taxable income on the basis of a tax year and file an income tax return. There are two kinds of “tax years” used for record keeping and income and expense reporting: calendar year, fiscal year.
- A calendar year is 12 consecutive months starting January 1 and ending on December 31.
- A fiscal year is 12 consecutive months ending on the last day of any month except December.
If you plan on hiring employees, make sure they complete the following upon employment: Form I-9 (Immigration Form) and Form W-4, Employee’s Withholding Allowance Certificate. Note: Payroll tax issues are some of the most expensive and difficult for employers to deal with so make sure you know tax rules governing employees to avoid future IRS issues.
An accounting method is used to determine when and how income and expenses are reported and is usually chosen when you file your first income tax return. There are two basic accounting methods:
Cash method: Income is reported in the tax year you received, typically deducting or capitalizing expenses in the tax year they are paid.
Accrual method: Income is typically reported in the tax year it’s earned, even though payment may be received the following year. Expenses are deducted or capitalized in the tax year they are incurred, whether or not they are paid that year.
Recordkeeping – Every business is obliged to keep records. Your goal should be to keep good ones because if you ever have to present your books to the IRS (and you may have to if you face an IRS audit), you will quite easily be able to accomplish the following:
- Monitor business progress
- Prepare accurate financial statements
- Show business receipts are separate from personal ones
- Keep track of deductible expenses
- Prepare your tax returns more easily
- Explain items reported on tax returns
Additional Business Resources:
Small Business Administration (SBA) Business Set Up Tips:
IRS: Checklist for starting a business
More Tax Help, IRS News and Tax Relief Tips:
- IRS Tax Help Basics for the Self-Employed
- Tax Help Tip-Avoid Common Tax Return Mistakes
- Tax Relief Weekly News Round Up
- IRS Practices Scrutinized This Tax Season
- Tax Resolution Expert-Five Reasons to Hire One