Tax Tips for New Business Owners

By Joel Handelsman, Toolkit Staff Writer

If you have, or are going to, open a new small business, the IRS has provided a checklist of common tax issues that all new business owners must address. Making decisions relating to these factors in a timely fashion will ensure that you don't get surprised later on. The issues the IRS has identified are:

• Choice of Business Entity. Every business has to select a form of organization. Choices range from sole proprietorship to multi-layered structures where there is a parent holding company that owns the actual operating entity. The most common types of business are the sole proprietorship, the partnership, the corporation, the limited liability company (LLC) and the S corporation.
  This choice will impact what tax forms you'll have to file, what legal formalities (both state and federal) you must meet, and a large number of other issues. It's worth it to take the time to examine your options, preferably with the help of a knowledgeable professional. Remember that you can generally change from one type of entity to another as your business matures.
• Tax Obligations. A business may have to collect, account for and remit as many as four different types of federal taxes. These include income tax, self-employment tax, employment tax and excise tax. Which taxes apply, and how they are reported, will depend on the form of organization.
• Employer Identification Numbers. An Employer Identification Number is used to identify a business entity for federal tax purposes. Generally, businesses need an EIN. A sole proprietor will usually use the owner's Social Security number rather than a separate EIN. If you do need an EIN, you can apply for it at the IRS website.
• Recordkeeping. Compliance with your tax obligations requires that you keep good records of your business activities. Good recordkeeping is also needed so that you can accurately track your business' financial performance.
  In most cases, you're free to choose any recordkeeping method that you want, provided that it accurately reflects your income and expenses. While the tax laws don't require any special kind of records, the type of activities that your business engages in will affect the type of records that you'll need to maintain for tax purposes. For example, if your employees use vehicles owned by the business in the course of performing services for the business, you'll need to be able to document the related vehicle expenses.
• Accounting Period. Every business has to figure its taxable income on an annual basis, but it need not be a calendar year. Although the calendar year is the most common accounting period, there may be valid business reasons to choose a different 12-month period, called a fiscal year. This is frequently useful when income and the expenses relating to producing that income are realized in different calendar years.
• Accounting Method. The two most commonly used account methods are the accrual method and the cash method.
  Under the cash method, you report income in the tax year in which you receive it, and deduct expenses in the tax year that you pay them. Under the accrual method, income is reported in the tax year in which you earn it, and expenses are deducted in the year you incur them.

Posted July 31, 2010.