I'm Darrin Mish. For 32 years I've practiced federal tax litigation — routine audits, Tax Court cases, and everything in between. If you're facing an IRS issue, here's what you need to know first.
In troubled economic times like these, many have lost their jobs prompting them to consider going into business for themselves. If you are contemplating starting a business for yourself, you should take heed to the guidelines set by the IRS which may save you lots of tax dollars in the long run. Here are some of the things you should decide upon which has a bearing on your taxes. Click here to read or watch more IRS Help resources.
The most fundamental decision you should make is the type of business entity to start. There are basically 5 types of businesses, namely a sole proprietorship, a partnership, a corporation, an S corporation and a limited liability company. The choice you make here will determine the type of tax forms you file, the taxes you pay and how you pay them. Depending on what business entity you operate, you would pay either one of four types of business taxes i.e. income tax, self-employment tax, employment tax and excise tax.
When you start a business, you probably would employ some staff to man your operations. In such a case, you would need an Employer Identification number (EIN). This number is essential for tax reasons. But if you are not certain you need an EIN, you should verify it by visiting the IRS website at www.irs.gov. Otherwise, you can apply for an EIN online.
In an efficient business, good record keeping is a must. So at the onset of your business you should keep good and up-to-date records that will facilitate savings on your taxes. With good and accurate records, you will be able to track your deductible expenses and report on items in your tax returns besides monitor the growth of your business. Part of good record-keeping is using tax software to prepare your taxes. There are many types of software in the market that helps you compile the figures you need when it comes time to submit your taxes and you should consider investing in one.
Closely related to good record keeping is your accounting method. You should decide on which accounting convention to use in your business. In general, there are two accounting conventions business owners follow that determines when to report income and expenses. The first accounting convention is the cash method of accounting which basically means you report income in the tax year you receive it and deduct expenses in the tax year you pay it. The second accounting convention is the accrual method of accounting in which you report income in the tax year you earn it and deduct expenses in the tax year you incur it.
Finally, there is the consideration of your tax year. Every business owner needs to figure taxable income on an annual basis called a tax year which can be either a calendar year or a fiscal year.
For more information on starting a business, go to www.irs.gov and click the “Business” tab. You may also want to access IRS Publication 583, Starting a Business and Keeping Records for more tips.