Ask an Accountant

What are some important things to consider when starting a new business?

Wednesday, August 19, 2015

Are you starting a new business? Congratulations!

Here are 5 tips to help you get off to a good start:

The success of a new business venture certainly depends on have a marketable product and the ability to create a demand for that product.  However, not knowing what your tax responsibilities are can sink even the best ideas.

  1. Business Structure.  Determining the type of business structure you will have is one of the first decisions that a new business owner must make.  There are two classes of business structure―tax and legal.  Common legal business structures include: sole proprietor, corporation, LLC, partnership and several others.  Tax structures are much fewer in number and include sole proprietor, corporations, Sub Chapter S corporations, and partnerships.   The type of tax business structure you choose will determine not only which tax forms you will file but also the type of tax you will pay (other than income). 

  2. Business Taxes.  Yes, Virginia there is more than one type of business tax. Typically we think of four types of federal business taxes: income tax, self-employment tax, employment tax and excise tax. There are advantages and disadvantages to each tax business structure you choose and most of the time, your choice of structure determines what type of tax you (or your business) will pay.  “Do I need to make estimated tax payments?”  “Do I owe any state taxes?”  “What are self-employment taxes?” and “What is flow-through income?”  These are just a few of the questions that should immediately come to mind if you are starting a business.  A tax professional can best guide you on the business structure that works best for you.

  3. Employer Identification Number (EIN).  “I don’t have any employees (and don’t plan to have any) so I don’t need an EIN, right?”  Maybe so, maybe no.  An EIN is essentially a social security number for your business.  The need for an EIN has nothing to do with whether or not you have (or ever plan on having) employees.  You may want to get an EIN for federal tax purposes as it provides a degree of further separation between the business owner and the business entity itself but it is not always mandatory to have an employer identification number. Talk with your tax preparer to help determine if you should apply for an EIN. 

  4. Accounting Method.  An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method from year to year. The two that are most common are the cash and accrual methods.  Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them (money in, money out).  Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them (I sold it but haven’t been paid for it or I bought it and haven’t paid for it yet).  This is true even if you get the income or pay the expense in a later year.  Your tax professional should be able to explain the differences between the two accounting methods more fully and help you determine which method best suits your business situation.

  5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

    The employer shared responsibility provisions of the Affordable Care Act affect employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees). These employers’ are called applicable large employers. ALEs must either offer minimum essential coverage that is “affordable” and that provides “minimum value” to their full-time employees (and their dependents), or potentially make an employer shared responsibility payment to the IRS. The vast majority of employers will fall below the ALE threshold number of employees and, therefore, will not be subject to the employer shared responsibility provisions.

    Employers also have information reporting responsibilities regarding minimum essential coverage they offer or provide to their fulltime employees.  Employers must send reports to employees and to the IRS on new forms the IRS created for this purpose.

    The Affordable Care Act has a large impact on businesses and you should consult your tax professional for guidance in meeting the requirements of the Act.

Source:  IRS Tax Tip 2015-15