If planning to start a business is on your horizon or you have just opened your doors, it is important to know some general information regarding the tax implications. Here are five basic tips as outlined by the IRS to get you started.
Know your "Type" of Business
Early on, you will need to decide what type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Corp (LLC). Each type of business reports taxes on different federal tax forms.
Types of Taxes
The kind of business you have drives the type of taxes you pay. There are four general kinds of business taxes: (1) income tax, (2) self-employment tax, (3) employment tax and (4) excise tax.
Employer Identification Numbers (EIN)
Obtain a Federal EIN for your business as you often need one for tax purposes. You can apply online at IRS.gov apply for EIN. Review this online information to determine if you need an EIN and apply as needed.
One of the best ways to stay organized is with good record keeping. By keeping good records, you will be ready at tax time. Accurate records keep track of important tax deductible expenses and depreciable assets. Good records will help you monitor your business' progress and prepare your financial statements. Whether by hand or by computer, good records are a key to successful tax filing.
Each business/taxpayer must choose an accounting method, which is the set of guidelines that determine when to report revenue and expenses. The methods used are the cash basis and accrual basis methods of accounting. Using the cash method, you normally report revenue in the year you receive it and subtract expenses in the year you pay them. Using the accrual method, you generally report revenue in the year you earn it and subtract expenses in the year you incur them. This is true even if you receive the revenue or pay the expenses in a future year.
For additional information, go to the "Business Taxes Page" on the IRS.gov website. Also available to the taxpayer is the "Starting a Business and Keeping Records", Publication 583, that may also help new business owners with the tax aspects of running a business. This publication is also available by calling 800-TAX-FORM (800-829-3676).