Tax advice for starting a business

August 22, 2023

Tips to start a new business right

Guest Author: Suzie Korth, EA, Duffy Kruspodin, LLP

Starting a new business can be daunting.  Here are my top tips to help set you up for success.

When starting a business, for tax purposes, there are several key steps to consider:

1. Choose Your Business Structure

Choose the appropriate business structure (sole proprietorship, partnership, LLC, corporation) based on your goals and tax implications.  Most businesses are classified as pass-through businesses, which includes sole-proprietorships, partnerships, S-corporations, and limited liability companies. These businesses’ profits flow through to the owners or members and are taxed as personal income. On the other hand, C-corporations’ profits are subject to corporate income tax.

2. Register Your Business

Register your business with the relevant government authorities and obtain any necessary licenses or permits. 

3. Obtain an Employer Identification Number (EIN)

Apply for an EIN from the IRS. This is important for tax reporting and opening business bank accounts.  It is not always required but good to have so you don’t have to use your social security number with vendors.

4. Open a Business Bank Account

Keep your business finances separate from personal finances by opening a dedicated business bank account.  I’ve always said if you do nothing else, open a separate bank account.  Deposit all business income and pay all business expenses from that account.  Come year end everything you need is in one place.

5. Track Income and Expenses

Set up a system to accurately track your business income and expenses. This will help you with tax deductions and reporting. Having a professional set up that system will ensure you are not missing any potential tax deductions.

6. Understand Tax Obligations

Familiarize yourself with federal, state, and local tax obligations for your business type. This includes income tax, sales tax, payroll tax, etc.  Reach out to your tax professionals to keep you in compliance.  This is what we do!

7. Choose an Accounting Method

Decide whether to use cash-basis or accrual accounting method. This affects how you recognize income and expenses for tax purposes.

8. Set Aside Funds for Taxes

Put aside a portion of your earnings for taxes, especially if you don't have taxes withheld from your income throughout the year.  Some prefer to open an additional bank account just for this purpose.

9. Consider Deductions

Learn about allowable business deductions that can help reduce your taxable income.  Again, rely on the professionals.  These are conversations to have with your accounting and tax people.  We love to educate. 

Other deductions are structured to benefit you now and in the future.  Business owners can use a variety of employer-sponsored retirement savings plans: SIMPLE IRA, SEP IRA, 401(k), and profit-sharing. Contributions for yourself and employees can be tax-deductible.  Luckily, business owners have until the due date of taxes to contribute to a retirement plan. However, some plans may need to be established before the end of the tax year.  Knowing your options at the start can save you big!

10. File Necessary Paperwork

Depending on your business structure, you may need to file different tax forms such as Schedule C, 1065, 1120, or others.  Your tax professional will help guide you on the necessary forms that are required for your business.

11. Pay Estimated Taxes

If your business doesn't have taxes withheld, pay estimated taxes quarterly to avoid underpayment penalties.  Staying on top of your accounting during the year will help you dial in these numbers and know what you should be paying quarterly.

12. Stay Organized

Keep detailed records of all financial transactions, receipts, and important documents for tax purposes.  Or have a professional do that for you.

13. Consult a Professional

It is advisable to consult a tax professional or accountant who specializes in small businesses to ensure compliance and optimize your tax strategy. 

Just remember that tax laws can be complex and can vary by location, so seeking guidance from professionals will help you navigate this process more effectively.

One of the best small business tax tips is to hire a trustworthy, skilled accountant to help you with your taxes. Since many tax-saving tips and deductions are only applicable to certain business entities, you might make a mistake when claiming items.

Hiring an accountant can mean the difference between a hassle-free tax return and the dreaded audit. To find the right one, you can ask colleagues, friends, and family for personal references. Alternatively, you could find a CPA in your area that has excellent reviews. Before deciding on an accountant, have an introductory phone call to see if they’re the right fit.

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Starting a business can be exciting and stressful.  For many small business owners, the thought of the nearing tax season can induce anxiety, panic, and worry. Contact a tax professional to ensure you are set up for success. If you don’t have one you trust yet, please reach out to us at Duffy Kruspodin.

Once you have your financial foundation for your business, consider going the extra mile to ensure you’re on the right path to success by working one-on-one with a business coach. Interested in learning more? Contact Julie Seal-Gaustad for a free consultation to get started.

ABOUT THE AUTHOR: Suzie Korth is a Partner at Duffy Kruspodin, LLP’s La Jolla office  with over 30 years of experience in public accounting. Suzie’s expertise includes working with private real estate investors, professional services practices, and small business owners with various needs, including providing outsourced accounting and financial services, income tax planning and compliance.

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