If you have started a new business, you will need to know more than just ten things about taxes. A CPA or tax advisor can keep you and your business on track and educate you about what you need to do to report income and file your taxes properly. If you start with these ten things, however, you will have more intelligent and informative discussions with your advisors.
1. Business or Hobby?
As much as your friends and family members, the IRS wants to see you make a profit in your new business. If you are not making any profit, the IRS might think that your business is a hobby, in which case you will not be able to deduct reasonable business expenses from gross revenues. The longer you go without making any money, the harder it will be to justify the profit-making motives of your new business. Net your expenses against gross revenues, but be careful about zeroing everything out or showing year after year of losses.
2. Are You a Corporation?
You will have a better opportunity to deduct expenses from business revenue if you set your new business up as a corporation. Talk to your accountant or an attorney about the best type of corporate entity (e.g. corporation, LLC, etc.) for your new business. The few hundred dollars you pay to set up the corporation will be well worth the expense from both a tax and a liability perspective.
3. What About an S-election?
You can file a Form 2553 with the IRS to declare “S-election” status. You can then report any profits that you do have in the business on your personal income tax returns. Your new business will still need to file a separate return, but with an S-election, it pays no taxes directly.
4. Did the IRS Accept Your Form 2553?
The biggest mistake that you might make (and the easiest mistake to avoid) is filing the form to be treated as an S-corporation but then failing to confirm that the IRS has accepted and acknowledged the form. The IRS gives you 75 days to file the form after you set up your new corporation. File the form as soon as you can, and if you do not receive a written acknowledgement from the IRS within 4 to 6 weeks, contact your local IRS office to ask about the status of the filing. If the form is not accepted, your business will be treated as a separately taxable entity.
5. Keep the Right Records.
It should go without saying that you need to keep and categorize your business’s receipts, invoices, and similar documents and materials for at least four years. Large, undocumented entertainment expenses are a red flag for IRS auditors. If you have large expenditures for entertainment, make special notations on the receipts related to the entertainment regarding the purpose of the expense, the persons you were entertaining, and how that entertainment relates to your new company.
6. Keep Business Matters Separate from Personal Matters.
Your new business should have its own checking account and credit cards. Resist the temptation to use a business credit or debit card for regular purchases like gassing up your car or buying groceries, even if you are using your car for business purposes or the groceries are for your office. If you fail to keep a clear line between your business and your personal expenses, you are giving the IRS a reason to audit your tax returns.
7. Make Estimated Tax Payments.
If you are writing salary checks to yourself, then unless you are using a payroll service that handles taxes for you, you will need to make quarterly estimated tax payments on your salary. Failing to make these payments will set you up for a nasty surprise at the end of the year when you might find that you owe thousands of dollars in taxes and underpayment penalties. Ask your advisors about unemployment insurance payments, also.
8. Save for Retirement and Healthcare.
Possibly one of the best benefits of running your own business is the opportunity to deposit pre-tax dollars into retirement plans and health savings accounts, and then seeing those funds grow on a tax-free basis. Consider putting your spouse and children on the payroll as well and establishing similar accounts for them. With the right strategy, you can set up self-directed retirement plans that allow investments in real estate and other assets that are not typically included in large employer-sponsored plans. You should spend extra time discussing this strategy with your advisors.
9. Filing the Right Returns.
Start by filing a Form SS-4 to get an Employer Identification Number (“EIN”), and then use that number to identify your new business on every other form you file. If the IRS accepted your S-election, you or your CPA will need to prepare an end-of-year informational return along with a “K-1” to report income that has been paid to you and that you need to declare on your own 1040.
10. State Taxes
If your business extends beyond your own state’s boundaries, you might be obligated to file state income tax returns in other states in which you do business. Again, your tax advisors will be able to determine which state returns you need to file.
Although the federal and state income tax codes are complex and convoluted, the tax challenges for new businesses are not overwhelming. The accountants and business advisors at GMLCPA in Tucson, Arizona, specialize in working with new business to help them navigate those codes. Please contact us for more information about our services and for assistance in addressing the tax issues faced by your new business.