A tax guide for entrepreneurs

August 15, 2017 1:24 PM

Taxes are rarely the first thing an entrepreneur thinks about — which is why advisors should. With that in mind, the IRS put together a short list of tax-related considerations for startup businesses that financial planners can share with clients.

Click through to see six tax considerations your entrepreneurial clients may have overlooked. The IRS provides additional resources at the Small Business and Self-Employed Tax Center.

The Internal Revenue Service (IRS) headquarters building stands in Washington, D.C., U.S., on Wednesday, Feb. 17, 2016. Taxpayers have until Monday, April 18 to file their 2015 tax returns and pay any tax owed. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

Taxes are rarely the first thing an entrepreneur thinks about – which is why advisors should. With that in mind, the IRS put together a short list of tax-related considerations for startup businesses that financial planners can share with clients.

Click through to see 6 tax considerations your entrepreneurial clients may have overlooked. The IRS provides additional resources at the Small Business and Self-Employed Tax Center.

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1. Pick a business structure.

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.

2. Pick a tax year.

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.

Internal Revenue Service federal building Washington DC USA

3. Know your business taxes.

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.

A tax advisor looks over paperwork while working with a customer at a Block Advisors office in San Francisco, California, U.S., on Wednesday, March 2, 2016. Block Advisors is a program recently set up by H&R Block Inc. that gives long term financial guidance. The deadline for filing 2015 taxes is April 15. Photographer: David Paul Morris/Bloomberg

David Paul Morris/Bloomberg

4. Pick an accounting method.

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.

IRS forms are displayed at the Philadelphia Public Library in Philadelphia, Pennsylvania, Thursday, March 29, 2007. Mike Mergen/Bloomberg News

MIKE MERGEN/BLOOMBERG NEWS

5. Keep good records.

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.

Implementation of videoconferencing is intended to serve taxpayers virtually via computers or mobile devices, explains Donna Hansberry, chief of IRS appeals.

The reflection of a pedestrian is seen walking past an Internal Revenue Service (IRS) office building in the East Harlem neighborhood of New York, U.S., on Saturday, June 24, 2017. The IRS online registration system for social welfare organizations will be updated to streamline the payment process, by combining the application and payment fee. Photographer: Timothy Fadek/Bloomberg

Timothy Fadek/Bloomberg News

6. Sign up for an EIN.

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.