Many times, we dream of what it would be like to “be your own boss”! It feels great and sounds even better to be able to tell your friends, family, and even people you’ve just met that, “I work for myself; I own my own business”. Deciding to leave a regular nine-to-five and to venture out to start your own business can be really exciting, rewarding, and it really is such a big deal in and of itself.
However, when it comes to knowing and following the tax laws and tax preparations, as it pertains to that business you’re going to start, that can feel like someone is speaking a completely different language to you.
Understanding that language is vital to the success of your business’s first few years of operation. So, obeying tax laws as a start-up should not be taken lightly at all. There are millions of people that start business and must shut their doors for one reason or another, and unfortunately, tax laws are sometimes one of those reasons.
It’s heartbreaking that some of us don’t know to:
a) Double-check with the IRS about any tax obligations for creating a separate business bank account,
b) Find out how best to avoid having their personal debt affect business assets.
To help you and your new company stay on top of some of the tax guidelines, we’ve compiled 8 crucial tax law/tips that every new entrepreneur, start-up, and sole proprietor should know before they get started.
Table of Contents:
You can and should get a Business Tax ID number. Obtaining a tax identification number online via the IRS website is a fairly easy process. The importance of an EIN number is that it allows you to report taxes for all your small business earnings in one place instead of separating the accounts individually.
This will benefit you in saving time when filing tax returns with the IRS. In addition, if you plan on hiring employees at any point in the future, it is also important that they have withholdings taken out of their paychecks. This is what will fund your future tax returns and keep you out of trouble with the IRS.
Another important business tax law for start-ups is to keep business accounts and business assets separate from your personal accounts and assets. This will not only help you with filing taxes, but it will also help prevent any business debt or issues from spilling over into your personal life.
By keeping them separate, you will be able to easily see all of the business income and expenditures on the business bank accounts and Form 1040's.
One of the most important business tax laws for a start-up is to take as many deductions as possible when filing the company tax return by using all forms of depreciation, especially those that are Section 179 eligible.
For example, if you purchase a brand-new computer, a new printer, and a new tablet for your new business’s purposes, you would be able to deduct all of these items from your tax return.
There are tax credits that will allow business owners to take deductions or income tax credits if certain conditions are met. Some common tax credits include the Employer Tax Credit, Child Care Tax Credit, Earned Income Tax Credit (EITC), First-time homebuyers credit, Health Coverage Tax Credit (HCTC), etc…
Keep track of these tax laws so that you can keep up with any possible tax breaks you could find yourself eligible for.
If you work out of your home, for instance, you have the potential to deduct the amount of your mortgage interest, real estate tax, utilities, etc. from your tax returns. So make sure to take advantage of this tax deduction if at all possible.
If you follow down the list on tax deductions for self-employed workers it's easy to see how making these changes can be advantageous when tax time comes around.
If you use Form 1040-ES then you will be able to estimate what tax payments are due quarterly to avoid any penalties that might incur when tax time approaches.
If you pay the tax that is due with Form 1040-ES, then the amount should be paid in full. The danger of not doing this could cause penalties and interest paid to the IRS.
It is important to keep tax records available so that they are easy to find if your tax audit occurs. When purchasing business assets, keep track of these purchases as well as any depreciation taken within the tax returns.
Things like car mileage logs are also helpful when it comes to tax time since you need all of this information to file for business deductions efficiently. Keeping good records will not only help you but it will benefit you in case there is a tax audit as well.
Lastly, tax planning is important to mention as a tax law for starting businesses. One must plan for tax time and tax years in advance if at all possible. You can limit any tax liabilities by doing tax planning ahead of time and trying to make deductions where you can legally do so. Planning ahead will allow you to offset tax gains and income and maximize tax savings and results within your business.
We understand that the whole idea of starting a business is always very exciting. All the things about being an entrepreneur sounds fantastic: making your own schedule, being your own boss, making the decisions, etc.
However, we also understand that oftentimes we [new business owners] don’t think about the risks and the possible tax implications for not following the tax laws prior to or during the process of starting that business. It is important to be ready; ready means getting things done right in the beginning.
When we hear the word audit, it’s scary and can make anyone anxious, because no one wants to be audited. However, there is always the possibility of being audited, so it is better to be ready when/if the time comes as tax audits can be a costly process. So, it is important to make sure that you are following the tax rules or else you could end up with fines or penalties from the IRS.
These 8 tax laws stated in this article are great tips for every start-up business, entrepreneur, or sole proprietor to keep in mind when making that exciting move to starting up, before opening your doors for business.
We also advise that you begin looking for and talking to and potentially hiring a professional Certified Public Accountant (CPA). A CPA works directly with new business owners and has extensive knowledge in the field. They would be able to help answer any additional questions you may have regarding any of these tips or other questions that you have that come up in the process of making that transition to working for yourself.
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