Author: Robert Steere Category: Accounting & Bookkeeping

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Are you getting ready to take the entrepreneurial plunge this summer to start a new business? If you are, the Internal Revenue Service (IRS), as part of its new series of summertime tax tips, wants to offer you some useful information and advice. It just issued its "Top Seven Tips for Taxpayers Starting a New Business" (IRS Summertime Tax Tip 2009-02). Through these tips, the IRS intends to enhance the awareness of new business persons regarding their federal tax responsibilities. Following are the top seven things the IRS wants you to know if you plan to open a new business this year (with additional comments incorporated).

First, the IRS advises that you decide on the type of business entity you are going to establish. The type of entity you establish for your business enterprise will determine which tax forms you will have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation. The income tax forms that relate to these business types are: Form 1040, Schedule C, for sole proprietorships; Form 1065 for partnerships; Form 1120 for corporations; and Form 1120S for S corporations.

Second, the type of business entity you operate determines what 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.

Third, the Employer Identification Number (EIN) is used as the primary identifier for a business entity for federal tax purposes. Generally, any new business needs an EIN. You can get more information about whether you will need an EIN and other issues by visiting the IRS website. The EIN is easy to obtain, either by filing a form or applying online at the IRS website.

Fourth, good records will help ensure successful operation of your new business. You may choose any record keeping 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. Therefore, a new business owner should be aware of the record keeping requirements of his or her business and should devote sufficient time and attention to maintaining good records.

Fifth, 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 most common tax years used. As you begin your new small business, determine the tax year on which you want to report your income. You may want to consider the annual business cycle in your industry as you make such a decision. And, if a fiscal year rather than a calendar year is important to your business planning, it may affect the type of business entity you choose.

Sixth, each taxpayer must 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 tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them. Again, the choice you make regarding accounting method may affect the decision you make regarding either the type of business entity or the accounting period you choose.