A tax guide for entrepreneurs

One of the first things clients will need to consider is how to structure their business — as a sole proprietorship, a partnership, an S or C corp, and so on. Each comes with different tax rules and different filing requirements, so the advice of an expert will be valuable.

How and when a business files its taxes is determined by its tax year, which can either match the calendar year, or be a fiscal year of any 12 consecutive months. In most cases, the business owner can choose whichever works best for them — but calendar years are required for businesses with no books or records, no annual accounting period, or in certain circumstances laid out in the Internal Revenue Code or income tax regs.

Besides income tax, a business may be subject to self-employment tax, employment tax and/or excise tax, depending in large part on the business structure it chose. Furthermore, they may also need to make estimated tax payments on a quarterly basis — and the IRS would really like it if businesses would use its IRS Direct Pay system to make them.

Depending on the type of business and the owner, the client will need to determine which set of rules to use for reporting income and expenses — which the IRS expects them to use consistently.

The two most common methods are the cash method (where taxpayers report income and deduct expenses in the year they occur) and the accrual method (where they report and deduct in the year income and expenses are earned or incurred, even if they get the income or pay the expense in a later year). This is another area where a knowledgeable advisor will come in handy.

Right from the beginning, encourage the business owner to keep good records and books to identify income; track deductible expenses; track their basis in property; substantiate purchases, sales, payroll and other transactions. Starting with good record-keeping practices will save time later.

Many businesses will need to apply for an Employer Identification Number, or Federal Tax ID Number, to identify themselves as a business entity in their interactions with the government. This isn't limited to new businesses — those that have changed their ownership or structure often need to get a new EIN. The IRS aims to make it relatively easy to apply for them online.