Business Tax Basics
First, pay all your taxes. Seriously.
We know, it sounds obvious. But you can’t plead ignorance, and tax mistakes can come back hard, especially if you’ve been successful. You can’t underpay your taxes and expect to get away with it for long. Even if you’ve been paying, the tax man can screw you up if you haven’t been paying attention.
First, incorporating as an LLC or an S Corporation will help limit your legal liability without adding a significant tax burden. Check our incorporation section for more detail there.
The IRS publishes a guide for small business taxation. It’s written in a mixture of straightforward English and IRS-ese, but here are a few of the important points.
- If you have employees, you need an employee ID number. Get one, they’re free.
- Have a separate bank account for your business transactions. Don’t try to run your business out of your personal checking account. The IRS ties its Employee ID system to that business account.
- If you expect to owe more than $1000 a year, the IRS expects you to make estimated payments every three months. Set aside your taxes as you go, if you can. If you decide to mail a portion of every check you receive to the IRS, it’s unlikely that they won’t cash it.
- If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
- You can choose any record keeping system that works for your business, but you need one that clearly shows a summary of your business transactions, your gross income, as well as your deductions and credits.
- Keep copies of your filed tax returns. Also keep supporting documents – the receipts and copies of your invoices and bills.
- The IRS says you need these records for “as long as they may be needed for the administration of any provision of the Internal Revenue Code” Translate that to mean you should expect to keep your records forever, or until an accountant tells you to burn your ledgers and buy a plane ticket for a country without extradition agreements.
- The IRS sets a period of limitations — the time in which you can amend your return to claim a credit or refund – in its Publication 583. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.
- Depreciation is complicated, but important. If you bought equipment for your business and you expect it to last longer than a year, you can start taking the lost value over time as a loss on your expenses. The IRS explains how to depreciate here.
- Get an accountant if you’re spending more time squirreling receipts away than working on your business. Accountants are a cost of doing business. And they’re deductible.