Starting a New Business:
It is pretty excited to start a new business. Of course, you are busy, but don't forget IRS and state and local tax agencies. Here are few things you need to consider if you plan on opening a new business.
- When you start a business, you need to understand that this is a business or a hobby. The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit. Both have different tax rules.
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that
is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.- You must decide what type of business entity you are going to establish. The type your business takes will determine which income tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation. Need help talk to your accountant.
- The type of business you operate determines what federal and state taxes you must pay and how you pay them. The common business taxes are income tax and self-employment tax, payroll taxes, and sales tax etc. talk to your accountant for more detail.
- An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN.
- If you use any other name than your personal name for the business, than you need to file for a fictitious business name.
- Good records keeping will help you ensure successful operation of your new business. You may choose any record keeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for tax purposes.
- Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
- Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
Helpful Links:
Publication 4591, Small Business Federal Tax Responsibilities
Publication 334, Tax Guide for Small Business
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