Starting a new business is an exciting and hectic time, and it’s tempting to put other things on hold while you concentrate on getting your business off the ground. However, one issue that shouldn’t be left until later is how you will handle the taxes for your business.
The tax law offers you some options for organizing your business, accounting for its income and deductions, and writing off your outlays for start-up costs and new equipment purchases. And the choices you make can contribute to the success of your businessor put a drag on its bottom line.
For example, one of their first choices you must make is how to organize your business. Depending on your situation, you may have the option of operating as a sole proprietorship, a partnership, a corporation, or a limited liability company. Too often, however, new business owners make this important choice by default. If an individual starts a business and does not make an affirmative choice, the business will be treated as a sole proprietorship for both legal and tax purposes. But is that the right choice for you and your business? We can help you decide.
Other important choices include:
- Your Tax YearWill you run your business and report its income on a calendar year basis, or does your business have a natural business cycle that lends itself to another accounting period?
- Your Accounting MethodMany small businesses use the cash method of accounting, which requires income to be reported when it is received and expenses deducted when paid. On the other hand, the accrual method may be more appropriate for some businesses. Under that method, income is reported when earned and expenses are generally deducted when they are incurred, even if the income is not received or the expenses are not paid until a later year. Businesses that produce, purchase or sell merchandise are generally required to maintain an inventory and use the accrual method for purchases and sales. However, here again, you may have a choice. A special exception permits certain small businesses to dispense with inventories and use the cash method of accounting.
- Your Start-Up ExpensesCertain expenses of starting a business are not treated as ordinary business expenses. These expenses can be written off over a period of yearsor they may be treated as nondeductible capital expenses that are added to the cost of your business. As a general rule, claiming the writeoffs will benefit your business’s bottom line. But you will have to make that choiceand take action to inform the IRS of your election.
- Your Equipment PurchasesThe cost of equipment you buy for your business is generally recovered through annual depreciation deductions over a period of years. Alternatively, you may have the option of claiming an upfront “expensing” deduction for your costs. However, the right choice for your business will depend on a number of factors, including the size of your purchases, your business income, and your plans for further purchases.
Bear in mind that making the right tax choices is only the beginning. You must be able back up those choices with adequate tax records. We can help you set up a tax record-keeping system and advise you on any tax questions that crop up as you organize and run your business.