There’s an old sitcom episode in which the title character and her husband fear an audit from the Internal Revenue Service. And every time the word “audit” is uttered, an ominous “dun-dun-DUN!” sound is heard.
No one likes to hear that sound.
But the tax laws can be equally ominous for those looking to start a small business. Here are a few tips to get started. Now, we must emphasize that these are baby steps, not a comprehensive guide. Find your friendly neighborhood accountant to get specific details about what you’re getting into.
The technical stuff
The IRS (dun-dun-DUN!) recommends determining a business structure. So, what kind of business are you looking to run? A sole proprietorship, in which you are the sole owner, or a partnership with one person or more? For the more elaborate plans, there are also the classifications of corporations, “S” corporations and limited liability companies.
Excellent records are crucial for many reasons: keeping track of how your business is doing, being accurate on financial statements and preparing tax returns.
So find the right accounting software (or if you’re old-school, use a ledger or a journal), and get to it. Here are some recordkeeping tips:
- Keep track of your expenses: This will help you take advantage of potential write-offs, from mileage to office supplies. It’s smart to consistently use the same credit card for business expenses. You’ll escape the confusion that comes with keeping track of multiple sources, like cash or a personal credit card.
- Identify and separate money sources other than sales: Sales are the primary tax source, so anything else — like loans or capital contributions — should be labeled as such. If those are lumped in with your sales, you’ll end up paying taxes on those amounts, too.
- Save money for paying taxes: If you don’t want to get hit with a fat tax bill at the end of the year, you’ll need to set aside money as you go. Figure out how much you’ll need to pay each month (your accountant should be able to provide guidance here), and put that money in a separate account. That way you won’t be tempted to dip into it, and you’ll be ready for the tax man.
- Be diligent about invoices: Look for accounting software that helps you send and keep track of invoices, so that you’re receiving payments in a timely manner, and identifying outstanding payments.
Once your small business is up and running, and you’ve taken the appropriate steps to keep accurate records of revenue and expenses, you should be ready for tax season. New business owners should be sure to tackle their taxes early in the process. And seek guidance from your accountant from the start about the ins and outs of potential deductions (there’s a lot to dig into there, so it’s better to know what’s what early on).
It can all be a dizzying process, but taking the proper steps along the way should make it much easier.