Are you opening a new business The IRS has many resources available for individuals that are opening a business. Here are six tax tips the IRS wants new business owners to know.
1) First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types are the sole proprietorship, partnership, corporation, S corporation and limited liability company (LLC).
2) The type of business you operate determines which taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
3) An Employer Identification Number (EIN) is used to identify a business entity. Generally, businesses need an EIN. Visit www.irs.gov for more information about whether you will need an EIN. You can also apply for an EIN online at www.irs.gov.
4) Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for Federal tax purposes.
5) Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the two types of tax years used.
6) Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and the accrual method. Under the cash method, you generally report income in the year that you receive it and deduct expenses in the year that you pay them. Under an accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them.