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.
1. 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 different type reports it's taxes on different federal tax forms.
2. 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.
3. 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.
4. Recordkeeping - One of the best ways to stay organized is with good recordkeeping. 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.
5. Accounting Method - Each business/taxpayer must use a consistent accounting method, which is the set of rules that determine when to report income and expenses. The most commonly used are the cash and accrual methods of accounting. 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 your incur them. This is true even if you receive the income 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).