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The Basics of Small Business Taxes

by Olufisayo
Basics of Small Business Taxes

Opening your dream business is an exciting venture and there is going to be a lot to consider! Most people get so caught up in the exciting details, that the business tax portion can get overlooked.  Don’t make this mistake!

If you’re starting your own company, you’re going to want to get familiar with the tax regulations in your area.  I would recommend getting in touch with an accountant before doing anything as they can help you with finer details involved, but until than, I’ve listed a few basics that may help get you organized on your small business tax journey.

Getting Started:

The planning stages of your business is the best time to start planning your tax strategies and finding an accountant; don’t wait until things are already rolling to sort these details out.

Find an accountant that can tell you how to keep and prepare documentation so that there is an organized method before you even begin.  Don’t underestimate the importance of organization and preparedness!

Tax Methods:

Different types of businesses have different tax strategies, so you’ll want to discuss this with your accountant to find out which best suits you.  For example, corporations have different tax regulations than sole proprietorship or partnerships.

       

Even though you will have to do prep work for any business model, you should decide with method best suits your business and get your legal documentation together before beginning anything.

Tax Years:

This is an important step and will determine how you set up your taxes for the entirety of your business life.  There are two types of tax years, the “Calendar Tax Year” or the “Fiscal Tax Year”.

The calendar tax year starts January 1st and ends December 31st; a full calendar year just as the name suggests. The fiscal tax year can begin any month of the year and end exactly 12 months afterward; for example, starting March 1st and ending February 28th.

The choice you make may largely depend on the timing of your business opening, or it could be based on any other factor. One is not better than the other, it’s simply a matter of preference.

Accounting Method:

Here is where you’re really going to want to get some research done.  There a literally thousands of programs you can use to help you with your accounting; you could use something as simple as Excel, or something as complex as QuickBooks or Simply Accounting.

       

It will largely depend on your type of business and which organizational methods you want to establish there.  You’re going to have to consider things like income records, expense reports, and paper documentation.  You can record revenue and expenditures in two basic ways; the cash method or the accrual method.

The cash method records income and expenses as they occur; while the accrual method records revenue and expenditures when they actually occur; even if no money has exchanged hands.  An example of this would be if there are Net30 days payments after a service has been provided. Again, this will depend greatly on the type of business you’re choosing to run.

Deductions:

This is the area that holds the most misconceptions.  There is a lot of buzz around what is acceptable and what is not; usually from people who are trying to squeeze through every loophole they can; but don’t get too excited because the deductions you’re allowed to make from your business are actually very black and white and don’t allow for much wiggle room.

Make sure you talk to your accountant about what is available as a write-off and what is not because it does vary from place to place.  Generally, you can deduct everything that is directly business-related; all cost of goods sold and/or job materials; however, meals and entertainment, even if for strict business purposes, are only 50% deductible.

There are many other guidelines to watch out for, like insurances and vehicle expenses; prepare yourself for those before you jump the gun and regret it later.  Your accountant will be able to give you a very clear understanding of this area.

       

Although starting a business is a very exciting and motivating time, there are very important steps you must take to ensure you’re complying with all the necessary regulations.  Often, business owners get so caught up and excited in the actual business details that they push their accounting to the sidelines, thinking it’ll all work itself out in the wash. Do not fall into this trap.

Having an organized and well-understood tax scheme is going to literally save your business before it even starts.  I cannot stress enough how important it is to acquire a professional accountant and take your time in setting up all the background details of your business to ensure the front lines are successful!

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