So you are all pumped about your new business idea and are already looking for customers. Before you get much further, make sure that you have ticked off these accounting items from your business to-do list. A little work upfront will save you a ton of work down the line.
1) Choose the right entity. The most common types are single member LLC, Partnership, S-Corporation, and C-Corporation. The type of business you choose will determine which tax forms you file. Each has its own set of tax implications as well. It’s always best to consult an attorney and CPA when deciding on your optimal course of action.
2) Apply for an ID number. On the federal side, you’ll need an Employer Identification number (EIN). You can apply online on the IRS website. You will also need a state identification number as well. If you are in business a sole proprietor, your social security number will be your ID.
3) Choose an accounting method. According to the IRS, 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. 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. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.
4) Keep copious records. Accurate record and bookkeeping will help you monitor the progress of your business and help you keep track of income and tax deductible expenses. In general, your bookkeeping will be the most useful piece of your tax preparation. Additionally, in the case of an IRS or state audit, you may be asked to explain the items reported. A complete set of records will speed up the examination.
5) Pay your business taxes. The type of taxes you pay will depend on you entity structure. Payroll taxes, self-employment taxes, and income taxes are the big ones to keep in mind. Keep an eye out for sales tax as well. State laws vary on these taxes, so be sure to stay up to date with your particular state rules and regulations.
6) Talk to a CPA. Having a trusted business and tax advisor is a necessary part of any business. I recommend creating a relationship with a CPA prior to tax season. Let the CPA become familiar with your business goals and objectives long before he or she is knee deep in tax returns. Don’t consider your CPA as an expense, rather an investment that could potentially save you thousands of dollars come tax time.