On behalf of the IRS, congratulations on your business startup.
Now that you're a business owner, you have the privilege of paying taxes as both a business and a business owner. And the amount of tax you will be required to pay depends a lot on the decisions you make now, during your company's critical startup phase.
From the outset, we strongly suggest new business owners clarify their tax situation with a professional accountant or financial consultant. Seemingly insignificant decisions can have substantial tax ramifications and substantial tax ramifications can dramatically impact your business's profitability. The bottom line is that the attention you give to business startup tax essentials will have pay off in real dollars at tax time.
Specific tax scenarios may vary, but the majority of business startups can limit their tax exposure by pursuing a handful of basic tax strategies.
- Choosing a business structure. The business structure you choose at startup will affect the way your business is taxed on a go-forward basis. Sole proprietorships and general partnerships are "pass through" business entities (i.e. profits and losses pass through the company and appear on the owners' personal tax returns) while LLCs and corporations may be taxed as an independent entity.
- Maintaining accurate records. Accurate recordkeeping processes are vital for tax purposes. Every expense that you fail to document is an expense that can't be deducted from your taxable income. Lax recordkeepers pay more taxes than they are required to pay – it's that simple.
- Paying estimated taxes. Entrepreneurs quickly become familiar with the concept of estimated tax payments. If don't understand what is required, it's in your best interest to get up to speed ASAP so you can incorporate payments into your short-term budget cycles.
- Navigating depreciation. Some business assets can be fully expensed in the year of purchase; others must be depreciated over a period of several years. Since IRS rules specify depreciation terms for various classes of assets, you'll need to consult your tax preparer before you count on the deductibility of a purchase.
- Managing self-employment income. As a business owner, you're self-employed – and subject to special tax rules. That means you need to understand your personal tax issues as well as the issues that relate to your business.
- Minimizing your tax liability. There are several strategies you can employ to minimize your business tax liability. Plan to meet with your tax preparer before the end of the tax year to conduct tax planning.