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Business Startup Info
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Starting a business? Check out these tax tips
If you plan to start a new business, or you've just opened your doors, it's important for you to know your federal tax responsibilities. Here are five basic tips from the IRS that can help you get started:
1. Type of Business —You will need to decide the type of business you are going to establish. The common types are sole proprietorship, partnership, corporation, and S corporation. Each type reports its business activity on a different federal tax form.
2. Type of Taxes — The type of business you run usually determines the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
3. Employer Identification Number — Oftentimes, a business needs to use a federal Employee Identification Number for tax purposes. Check IRS.gov to find out whether or not you are required to obtain and use an EIN. If you do, you can apply for an EIN online. Sole Proprietors may choose to get an EIN, but it's not a requirement by the IRS. However, in order to open a business bank account, the bank will ask you for your EIN.
4. Recordkeeping — IRS requires that you keep good records. This will help you when it’s time to file your business tax forms at the end of the year and help you if you get audited. They help track deductible expenses and support all the items you report on your tax return. Good records will also help you monitor your business’s progress and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses. You may want to hire a bookkeeper to take care of your record keeping.
5. If you have a business, IRS expects you to have a profit motive. Businesses should not be started with the intent to have a tax write-off. You're expected to make a profit in two of five years. Of course, not all businesses are profitable, but you are allowed deductions for things you use in your business to offset your income. If your business is not profitable several years in a row, you should shut it down. There are things that you can do to defer paying taxes on your business income, such as a Simplified Employee Pension Plan, where you can put 25% of your net income into a tax-deferred account. You won’t pay taxes on the deposits until you begin drawing them out at 59 ½ years old like an IRA.