Contributor: Kim Fourman
Company: Loggins, Kern, & McCombs
Title: CPA and Partner at Loggins, Kern, & McCombs
The decision to start your own business and finally be your boss is a perspective-changing experience. You will likely receive a lot of congratulations, questions, and advice throughout your startup process. It’s human nature for people to want to pass on their valuable knowledge to new entrepreneurs about marketing, budgeting, the importance of networking, etc. The emphasis on budgeting to stay afloat during the early stages often neglects to consider the tax consequences and potential tax benefits of owning your own business.
The task of handling your individual tax return might be something you’ve done on your own for years, but the added complications of owning a business potentially warrants consulting a CPA.
Regardless of whether you seek assistance from a tax professional or manage your own accounting, IRS Publication 535 is a valuable resource for specific answers and examples. This is a general overview of things you should consider when starting a business from a tax perspective.
6 Tax Considerations for Starting a Business
1 – Business Bank Account & Credit Card
First, creating a separate checking account and credit/debit card that is used solely for your business is very important to keep business activity separate from personal activity. This will also help you maintain your books and records more efficiently and accurately. Be sure to do this before beginning operations to avoid confusion.
2 – Record Keeping & Substantiation
The IRS requires that all expenses be “ordinary and necessary” in order to be deductible. You should keep a mileage log detailing the distance, date, purpose, and who you are meeting with. Meals are now only 50 percent deductible when they meet the business purpose test. You should keep receipts and label them with attendees as well as what was discussed. The records should be kept for at least seven years.
3 – Choice of Entity Structure
Will you be operating on your own, have a partner, or have employees? Will you need the asset protection that an LLC (limited liability company) provides? If you determine that being a corporation suits your business best, you will need to decide whether to be taxed as a C corporation or an S corporation. C corps are taxed independently from their owners at the 21 percent federal tax rate, while S corporation income is passed through to their owners at individual tax rates.
4 – Startup and Organizational Costs
Starting a business is usually expensive and requires careful planning. The good news is that in your first year of operation you can deduct up to $5,000 of organizational expenses and $5,000 of startup costs. Anything in excess of the $5,000 in startup costs that you incur will need to be amortized over 15 years. If you think you will have a net loss in your first year of operations, it may be best to amortize all of your startup costs to offset income in future years. Organizational costs are expenses that you incur to form your entity, register with the secretary of state, and things of that nature. Startup costs include expenses such as research to start the business, advertising, office supplies, etc. Large purchases such as a computer will be capitalized and depreciated over the life of the asset, reducing your taxable income each year, or written off in the first year (this will need to be discussed with your tax advisor.)
5- Payroll Taxes
Ensuring that you have the proper procedures in place for federal and state payroll deposits for employees or estimated tax payments for yourself is imperative. In fact, payroll tax delinquency is a very fast way to begin receiving notices and enforcement from the IRS. There are several reputable companies that can handle payroll processing for you, but if you choose to do this yourself make sure you receive the proper training.
If you pay non-employees for work, you should consult a tax professional regarding the 1099 requirements. Requiring non-employees to complete a Form W9 before issuing payment to them is a good practice to implement.
6 – Personal Tax Liability
The switch from being an employee to self-employed has enormous tax implications. Personally, you might be required to make quarterly estimated tax payments to avoid an underpayment penalty and owing a large amount when you file your tax return. Keep in mind, that if you are structured as anything other than an S or C corporation, the net income of the company is generally subject to self-employment tax. The employer portion of Social Security and Medicare tax will now be your responsibility. Consulting a CPA to assist you with structuring your compensation, withholding, and estimates is a good way to ensure compliance and avoid surprises during the tax filing season.
By: Kim Fourman, CPA, a native of Westfield, New Jersey, resides in Tyrone, Georgia with her husband Brian and their four children, Kelly, Matthew, Hannah, and Andrew. Kim received her BA degree in Mathematics from Cedarville University in 1996 and her MBA from Liberty University in 2013. She is a Certified QuickBooks ProAdvisor and a member of the Georgia Society of CPAs and the American Institute of CPAs. Kim has been with Loggins Kern, & McCombs since 2011.
Michel Bell, Tax Accountant at Loggins, Kern, & McCombs. Michel received her BA in Accounting from Georgia State University in 2016 and her Master’s in Taxation from Georgia State in 2018. She is a member of the Tau Alpha Chi tax organization and will be sitting for the CPA exam in 2020. Michel joined Loggins, Kern, & McCombs in 2019.