04 Apr New Business? Know Your Tax Obligations.
“Just Do It Already,” a motto of sorts for entrepreneurs, right? Yes! Why not start a business and put your brilliant idea to work? Entrepreneurs have a natural knack for finding problems which need solving, needs which should not be ignored and an ability to build business where others failed to see a market even existed. With a keen ability to anticipate all risks and rewards, where do entrepreneurs tend to fall short? Taxes. Whether you are building a business or trying to expand an existing organization, the smartest entrepreneur arms him or herself with the knowledge of the tax laws that effect his/her business before opening the doors.
The Internal Revenue Service is divided into various divisions, one of which is wholly dedicated to the collection and examination of tax filings for small businesses and self-employed individuals with gross receipts under $10 million per year. This means the IRS has a division dedicated to ensuring your business meets its perimeters at all times. How do you also ensure your business is in compliance with the government? If you have made a few mistakes in the management of your business’ tax life, how do you recover and get back on the right track? Here are a few tips for ensuring you get your business off on the right foot:
- Learn About Your Business’ Tax Obligations
The choice of business entity is an important decision for a business owner. Business owners must decide what level of liability protection is needed for the business as well as what entities support raising capital from potential investors and borrowing funds from banking institutions. Equally important, business owners need to know the tax implications for each type of business entity at both the federal and state level.
For example, LLCs are taxed as pass-through entities and are essentially disregarded by the federal government. Thus, while a Limited Liability Company (LLC) provides some liability protection from creditors’ claims, it will not provide a business owner with a level of protection from federal tax liabilities unless certain elections are made.
In addition, various states subject certain entities to annual fees in addition to general income tax provisions. Understanding the differences in the entities from a tax perspective is crucial to ensuring your business is in compliance as it operates. Remember to examine the tax obligations of each entity type at the time of formation to set yourself and your business up for success.
- Incorporate a Quarterly, or Weekly, Schedule into your Business Organization
Whether you have employees or not, you should review your business’ tax obligations on a quarterly basis, at a minimum. If you have employees, your business may have weekly requirements to make federal tax deposits as frequent as your payroll periods. If you do not have employees, your business income will be taxable to you as an owner or the business, depending on the type of entity you have. In order to protect yourself and your business from incurring tax liabilities in the future, you should have a quarterly plan to review your net income and make estimated tax payments on the tax accrued year to date. Later, when you file your tax return, you will have over 90% of the tax due on your return already deposited with the Internal Revenue Service. In addition, deposits should be made with your state and your business should estimate local taxes and fees to incorporate those obligations into the business budget. By understanding your business’ obligations from all tax authorities, you can set your business up to avoid tax liabilities year after year.
- Secure a Tax Perspective on all of your major business transactions
In many instances, business transactions can be taxable events. Whether a business property is sold and proceeds are used to secure a replacement property or business debts are forgiven, the business may have taxable income as a result of the transactions that need to be reported timely and accurately to obtain the full benefits afforded by the Internal Revenue Code. If your business is engaging in any major transactions, it is in the best interest of the business to obtain a tax perspective before the transaction closes. With that additional information, you can best position your business to avoid substantial tax liabilities at filing time.
Building business on your own is difficult in itself; ensure your business is not only set up for success but also has a defense against any claims against improper tax assessments. Learn the ropes and address your business’ tax needs early and often; freeing you up to focus on growing your business without the added stress of not knowing where your business stands with taxing authorities.
Whether your business is catching up, starting out, or secretly facing an economic doom, Tax Defense Partners can help you resolve your tax matters permanently and discreetly.