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New Business? Tax Issues to Consider

New Business? Tax Issues to Consider

Article Highlights:

In spite of COVID-19 restrictions many entrepreneurs are considering possible new or additional business opportunities. So, if you are planning a new business start-up and are incurring some expenses, you probably anticipate deducting those expenses in the first year of the business’s operation. Unfortunately, it is a little more complicated than that. Expenses a business incurs in the beginning can include equipment purchases, vehicle purchases and use, leasehold improvements, organizational costs and start-up expenses, and each receives a different tax treatment.

Even before you begin incurring expenses for equipment, leases and the like, you must decide what type of business entity you are going to establish. The type of business entity you choose will determine which tax form has to be filed. The most common types of business entities are the sole proprietorship, partnership, corporation, and S corporation, some of which may also be structured as a limited liability company. The choice of entity will affect the tax outcome of your business for years to come.

How the business you operate is structured will determine what taxes must be paid and how you pay them. The four general types of business taxes are the income tax, self-employment tax, employment taxes, and sales or excise tax.

An employer identification number (EIN) is used to identify a business entity. Most businesses need an EIN, and your business will definitely need one if you hire employees, regardless of the type of business entity selected.

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 accrual method. Under the cash method, income is generally reported in the tax year it is received, and expenses are deducted in the tax year they are paid. Under an accrual method, income is generally reported in the tax year it was earned, even if payments for the goods or services of the business are not yet received, and expenses are deducted in the tax year they are incurred, even though they are not yet paid.

Once you have decided upon a business entity and you are ready to begin acquiring the assets needed to conduct the business, you can begin planning your purchases and other expenses to fit your particular circumstances and business entity. Here is a rundown on how these expenses can be deducted.

Next we can look at the various ways your business acquisitions can be deducted. These rules also apply to existing businesses. 

For most small businesses, this means the entire cost of equipment and office furnishings can generally be written off in the year of purchase, if that is also the year when the equipment is put into service, using the bonus deprecation or the Sec 179 expensing election.

Sometimes it may not be appropriate to write off the entire cost in the first year, depending on your business and personal circumstances. This is part of the planning required to maximize tax benefits.

The foregoing is an overview of some of the start-up and expense issues in a business’s first year. As you can see, major decisions and elections need to be made that can have a lasting impact on a new business or even an existing one for that matter. You are encouraged to call this office to help you plan and establish your business. if you need assistance with your accounting, bookkeeping, payroll or sales tax reporting, or other federal, state, and local licensing and compliance issues, this office can also help with that.

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