Tax and Accounting Considerations – Starting New Business
Many people are interested in starting their own business, but often do not research the tax and accounting considerations. Running a business can become a great thing, but it also can be a major hassle if you consider all factors.
Imagine you have a startup idea that you believe will make you a lot of money. Then you discover that your lack of knowledge has turned into a debt risk. This can occur if you are unaware of the tax and accounting considerations of starting a new venture.
Here, we are going to cover all tax and accounting considerations you need to have in your mind as you embark on a new adventure as a business owner.
How Does Starting a Business Affect Taxes?
First things first, starting a new business will definitely have an impact on your taxes. Because business is a for-profit venture, there will be revenue. There’ll be business expenses that are tax-deductible. Depending on whether there your business made a net profit or loss is the factor that will determine additional or lowered tax liability. This is in addition to any other taxes imposed on other types of income.
Preparing Your Business Taxes
An important decision to make is – what sort of entity your business will be? Your options for the business entity are sole proprietorship, partnership, S corporation, or C-corp. This will affect how you prepare your taxes. Depending on the entity type, you must utilize different forms to file the business taxes.
The paperwork that you need to file for each entity type is below:
- For sole proprietorship – Form schedule C, which is filed with their taxes.
- Partnership – form 1065
- S Corps – Form 1120 S
- C Corps – Form 1120
These forms will primarily show the business’s income and expenses to establish whether or not there is a tax due.
More About Quarterly Estimated Payments
The majority of taxpayers meet their tax obligations when their employer withholds federal and/or state taxes from each paycheck. When you are a sole proprietor launching a business, you’re entirely responsible for your taxes. The majority of self-employed taxpayers meet their tax payment obligations by making quarterly estimated tax payments by mail or online.
If you work for another company besides your self-employment, you could be capable of meeting your tax payments by increasing the percentage of withholding from your paychecks.
But, don’t forget – you may be fined with an underpayment penalty if you do not make your required payments. If you meet certain exemptions or waivers, you can avoid the penalty.
Tax Scrutiny for New Businesses
Self-employment, unfortunately, will be one of the IRS’ favorite audit priorities. Though being audited does not necessarily indicate you’re in jeopardy unless you’ve committed an offense, it’s important to be prepared for the worse. In order to claim the full amount of the deductions for which you qualify, you should keep meticulous records of your income and expenses.
Automobile, travel, entertainment, food, and work-at-home costs, for example, demand special attention since they are subject to certain record-keeping requirements and/or tax deduction limitations.
It can be difficult to plan for your first year of paying taxes as a small business all by yourself. However, deciding on the type of small business entity you run, attempting to minimize tax errors before they occur, and trying to record accurate costs, write-offs, and other essential tax documentation will also save you time and money down the road!
Being ready for tax filings is far better than rushing to pay taxes or risking an audit later.
Many of the tax considerations of starting a business are in this article. If you’re thinking about starting a business, this can be a useful resource. It is better to talk with a tax consultant for more extensive and precise information that is specifically for you.
Team at Your Part Time Accountant is always ready and happy to assist in any way. Please contact us at any time and we will set up an appointment to assist you in getting started on the right foot.