When launching a new business, entrepreneurs rarely think about taxes and other back office administrative items. This costly mistake can be avoided with the help of a tax expert. Caroprese & Company has several tips for startups who may be overlooking basics about small business taxes and potential tax savings.
Find a Business Structure
The first step for a startup is to decide on its structure. Is the company a partnership, an S or C corp, a sole proprietorship, or something else? Every business structure has its own filing requirements and rules. An accountant has expertise on each structure’s benefits and drawbacks. Depending on what structure a business chooses, it may be subject to additional taxes, such as employment tax, excise tax, or self-employment taxes. Some business structures may require companies to pay quarterly estimated taxes as well. Failure to comply with IRS and state rules for each structure can cause a new business to incur costly penalties which are detrimental to any business, let alone an emerging company that is just trying to survive through the early startup cycle.
Choose an Accounting Method
A business will have to decide on a consistent set of rules for reporting expenses and income. The cash method and accrual method are the two most common. The cash method is when taxpayers report income and deduct expenses in the year they occur. With the accrual method, taxpayers report and deduct in the year income and expenses are earned or incurred. This occurs even if a business receives income or pays the expense in a later year.
Determine Your Tax Year
When and how any business files its taxes is determined by its tax year. A tax year either matches the calendar year or is a fiscal cycle of 12 consecutive months. A business owner must decide which option is right for them, and many variables come into play. The IRS requires, however, that any business which does not keep books or records or does not have an annual accounting period to adopt the calendar year. In general, small businesses may find calendar tax years easier to manage. But a fiscal year may be a more viable option for seasonal businesses, for example, where calendar years may split a season along with reported income. This can cause a distorted view of income and expenses.
Maintain Accurate Records
This may sound simple, but startups need to keep accurate, clean, organized records from day one. Records should track deductible expenses, income, property basis, sales, payroll, transactions, and substantiate purchases. Meticulous record-keeping will save startups valuable time and money later.
Sign up for an EIN
For its interactions with the government, startups will have to apply for a Federal Tax ID Number, or Employer Identification Number (EIN). This applies not only to new businesses, as often those who have changed structure or ownership will have to apply for a new EIN. The IRS makes this process rather simple through online applications, however, this is a step that businesses should never overlook.
A Caroprese accountant can elaborate on and help guide your startup through any of these tips. Contact a Caroprese tax expert to have an expert craft a tax strategy best suited for your business.