Posted by Elliot Kravitz, ATP

How To Start a Business and What it Means For Your Taxes

How To Start a Business and What it Means For Your Taxes

Starting a business can be an exciting new adventure for those with an idea who wish to be self-employed.  There are several things to consider, however, when you are opening a business to ensure that you are following legal guidelines and planning your finances properly.  Elliot Kravitz, ATP. can help potential entrepreneurs start their businesses in an organized way, and makes sure they are claiming the deductions they are entitled to.


    When starting a business, the first thing you want to do is start a business plan.  A business plan organizes your goals and answers to questions such as who you are selling to, your long-term goals, finances, and marketing.  You want to make sure you include what your business is, and your eventual goals, then outline how you will accomplish your goals.  Research on your target market should be included as well in your business plan, and how you expect to reach them and grow in your market. 


    Also in your business plan should be the information on how you will organize and manage your company, including roles which will need to be filled.  Include details about your product or service. 

 

    While creating your business plan, you should be thinking about how you will financially support your business.  Your startup costs will need to be funded, either by you personally or by an investor or loan.  If your business is going to be a new full-time job, you want to make sure you have enough money saved up to not only start your business, but support your lifestyle in the time between starting your business and making a profit.  If you need financial assistance, you will need to explore your options.  A commercial loan through the bank, or small business loan through the SBA can be viable options.  An investor is also a good option if your business has large start-up costs.  Using an investor usually means that another company or individual will have a say in the running and direction of the company.

  

    After you’ve formed a clear plan for the running and financing of your business, you will need to choose your business entity.  Although you can change your business structure, it is highly recommended that you take careful consideration in choosing your entity before you decide, since the entity legally defines your liability and your tax filing.  A sole proprietorship means that you own the business by yourself, and will be personally responsible for debt and legal obligations.  A partnership divides that liability between two or more people.  If you want to be personally protected, you can separate your liability from your company’s by forming a corporation.  Corporations are responsible for their own liability, and can own property, pay taxes, sign contracts, and be sued.  They are considered a separate entity from the personal owner.  A Limited Liability Corporation will put you somewhere in between these levels of liability.  You have personal protection as a separate entity, but some tax guidelines will be those of a partnership.


    Once you’ve decided what your entity will be, it’s time to register with the government.  As a corporation, you must obtain an articles of incorporation document.  This document outlines procedures and guidelines for the running of the corporation, and for dissolution of the company.  If you are not incorporated, you will need a DBA, or “Doing Business As” form if you are doing business under a name other than your own.  You will also need an Employer Identification Number from the IRS.   For Sole Proprietorships without employees, you do not need an EIN, however, this is a way to keep your taxes separate and ensure that you are prepared to hire someone if needed in the future.

  

    When you open a business, there are certain benefits available on your taxes for the year based on your startup costs.  If you are a corporation, you are required to spend this money before you go into business.  You will typically depreciate your startup costs, rather than deduct the expenses, since they are considered to be long-term assets.  Depreciation means that you can stretch the expense over a number of years so that a portion is deducted each year for a predetermined length of time.  Certain costs that are not depreciated can be amortized, which is a similar process except that you can determine yourself what the period of time is to divide your costs.  If you expect to make a profit in future years, this option is for you, since the deduction will apply to the years you need it the most.  In order to amortize your costs, they must occur before you open.  However, your startup costs can only be claimed after the business is started, so timing your expenditures and opening is crucial to claiming your costs at the time when they are needed.  When you do start up your business, the startup costs will still be deducted if they did not occur that year, but in order to claim them in the same year they are spent, your business will have had to have started that same year.  Also, some equipment cannot be claimed as a startup cost, and should be claimed as a regular business expense.  For detailed information on business taxes and startup costs, contact Elliot Kravitz, ATP.


It’s important to keep your receipts and expenses on file in order to claim the startup cost. The IRS often requests proof of expense, and recommends that you keep personal records for at least seven years.  However, there are several business reasons that you should keep the startup costs on file for the duration of your ownership, regardless of time.


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