5 Tax Tips for New BusinessesPublished:
Federal Tax Information for People Who Are Starting a Business
Starting a new business is an exciting adventure, but also a major undertaking. Although, as a new business owner, you may be an expert in your field or industry, you may be new to paying taxes as a business entity. Unfortunately, the IRS does not allow a learning curve for first-time business owners — it still expects that all rules and regulations will be followed to the letter. To avoid expensive penalties and interest charges, here are 5 tax tips that can keep you out of hot water with the IRS.
1. Maintain Detailed, Accurate Records
The best defense is a good offense. In regards to taxes, this means keeping very detailed records of all your business transactions. Those records should include payments for all business-related expenses, along with copies of those receipts. Whether you do your own bookkeeping or hire a professional, you will need to decide whether you are going to use a cash or accrual accounting method before you begin. In addition, all business records should be kept for no less than 3 years in case of a tax audit. Note that certain records must be kept for 5 to 7 years, or even longer.
2. Keep Separate Business and Personal Accounts
One of the easiest mistakes to make as a sole proprietor or owner in a partnership is using bank accounts and credit cards for a mix of business and personal transactions. Making business purchases using a personal credit card or depositing business funds into your personal bank account can make a mess of your records. Start business bank accounts for your deposits of receipts, and use a debit card or credit card in your business name for all business purchases. Keep all business transactions separate from your personal finances.
3. Learn What Tax Credits Are Available for Your Business
There is a plethora of business tax credits available through the IRS to help reduce your tax liability or obligation. Not applying for or using these credits is like throwing money in the trash. There are tax credits for hiring employees from certain disadvantaged groups, tax breaks for employee healthcare benefits, and many other opportunities to save money on your business taxes beyond your regular tax deductions. At the same time, calculating these credits incorrectly (or without proper documentation) could mean underpaying your taxes and incurring penalties as a result.
4. Understand What Taxes You Will Owe and When
Business taxes are very different from personal income taxes. Depending on the type of business structure you have for your company, you may need to pay taxes for income, self-employment, employment, and excise or sales tax. Also, most businesses need to pay estimated Federal tax payments on a quarterly basis, plus estimated local and state tax payments as required in your city and state.
5. Get Professional Tax Advice
While you may want to save money by doing your own bookkeeping and tax filing, it could cost you more than you think. The tax laws and regulations are extensive and ever-changing for businesses, making it difficult for even the most industrious business owner to keep up with how the tax laws apply to their company. Hiring a professional accountant and/or tax attorney to (at minimum) discuss your yearly deductions, tax credits, and other business tax concerns can save you a lot of money in the long run.
Understanding and adhering to the tax laws set for businesses is an essential factor in running your own company. You can use the knowledge of tax deductions and credits to reduce your tax liability, essentially raising your profit level. In addition, you can reduce the chance of paying any late fees or penalties to the IRS for non-compliance, which can also affect your bottom line. Getting on the right tax path from the beginning will help in your journey towards building a successful and profitable business.