Starting a new business? Be aware of your federal tax responsibilities. Here are the top six things the IRS wants you to know if you plan on opening a new business this year. Also be sure and look at the IRS website for more information.
1. Decide the type of business entity you are going to establish either in California or some other state (such as Nevada or Delaware). The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
2. The type of business you operate in California determines which tax form you have to file, 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.
3. Generally, businesses need an EIN. An Employer Identification Number is used to identify a business entity. You can also apply for an EIN online at IRS.gov.
4. Good records are necessary. Which recordkeeping system is suited to your business is up to you so long as it 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. As a business taxpayer, you 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.
6. You 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 an 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.
Want to incorporate? Create an LLC? Call a business attorney. Call Mitchell A. Port at (310) 559-5259.