4 Tax Planning Essentials for Running A Business.

By Sheneya Wilson

You did it! You came up with an amazing idea and now you are ready to start a business ... now what?

Many times, small business owners jump into entrepreneurship without understanding how to handle taxes for their new business or getting the guidance they need to succeed. Unfortunately, this can hinder growth and discourage some small business owners from continuing operations.

According to the statistics, most businesses fail within their first five years, often due to one of the following reasons: a lack of sufficient capital, poor management, inadequate business planning, improperly funded marketing initiatives, and cash flow problems. Lack of adequate business acumen is a contributing factor to this cause.

Below are the four essential steps to keep in mind when starting and running your new business. These four essentials are related to the beginning stages of your business and creating a strong financial foundation. Each of these items plays a huge role in how your business reports and will have an impact on tax planning for your new business – both at the federal and state level.

1. Get Information.

Your brand and business idea needs to be protected in the case of litigation or if someone is attempting to leverage your intellectual property!

How do we achieve protection? By creating a separate entity for your business operation, maintaining separation between business and personal finances, and protecting your intellectual property through the use of trademarks, patents, or copyrights.

We’ll focus on the first way, creating a separate entity for your business operation. Here are the five most common recognized entities:

  • C-Corporations - In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure out its taxable income. Also, a corporation can take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders. C Corporations profits are reported on Form 1120, Corporation Income Tax Return.S-
  • Corporations - S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. Income/loss is reported by owners on Form 1120S, Income Tax Return for S Corporation (info only), and Form 1040, Individual Income Tax Return.
  • Limited Liability Corporations (LLC) - LLCs are pass-through entities. Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner. A few types of businesses generally cannot be LLCs, such as banks and insurance companies.
  • Partnerships - A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc. from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes their share of the partnership's income or loss on their tax return. Income/loss is reported by owners on Form 1065, Return of Partnership Income (info only), and Form 1040, Individual Income Tax Return through the issuance of a Schedule K-1.
  • Not-for-Profits - Non-profit status may make an organization eligible for certain benefits, such as state sales, property, and income tax exemptions; however, this corporate status does not automatically grant exemption from federal income tax. To be tax exempt, most organizations must apply for recognition of exemption from the Internal Revenue Service to obtain a ruling or determination letter recognizing tax exemption. Charitable organizations that decide to apply for federal tax-exempt status under section 501(c)(3) of the Internal Revenue Code must include certain provisions in their articles of incorporation.

Sole proprietorships were not included on the above list, as they are not a legal entity and therefore do not provide any corporate protection. This means that as a sole proprietor, your personal assets are still at risk and can become available to a plaintiff in the case of litigation.

Once the entity is formed, you should open up a business checking account and use it only for business purposes to maintain separation to continue protecting your personal assets.

2. Stay organized.

A business is only as strong as its records and numbers. Be sure to keep all important corporate documents on file to protect yourself in the event of litigation or an audit.

Examples of documents to keep on file:

- Articles of Incorporation/Organization
- Federal Employer Identification Number (EIN)
- Operating Agreement
- Bylaws
- Shareholder Binder
- Bank Statements
- Home office expenses
- Leases
- Rent Agreements

- Expense Receipts
- Tax Returns
- Licenses
- Permits
- Contracts
- Invoices
- Receivables
- Payables
- Proof of Work

- Statements of Work
- Payroll Records
- Proof of Insurance
- W-4
- W-9
- Payroll Reports
- Employment Applications
- Trademark
- Copyright
- Patents

3. Choose an Accounting Solution.

As stated before, a business is only as strong as its records and numbers; therefore, as a business owner, you should have some mechanism for bookkeeping set in place to keep track of revenues and expenses. Here are a few options:

  • Use an Excel sheet
    With proper coding, an Excel template can act as a good system for bookkeeping
  • Use an Accounting Software
    Accounting software can help automate and expedite your business’s bookkeeping
  • Hire a Bookkeeper
    If you are not comfortable with handling the numbers on your own, hire an expert! Though automated accounting software is useful, as your business grows in complexity, you’ll want to ensure that income and expenses are properly categorized and in accordance with the applicable accounting principles. A professional bookkeeper with experience in your industry can provide more expert guidance than an algorithm when faced with non-routine transactions.

4. Stay in compliance and pay your taxes!

Depending on the state your business is incorporated in, you may be subject to additional compliance requirements. For example, some states require businesses to update their information each year or biennially. Typically these annual or biennial filings are requested for the business to update its registered information with the state, which could include: the name and address of the business, information about its chief executive officer, the organization's board member(s), and the address to which the Secretary of State shall forward copies of any service of process when acting as agent of the corporation.

In addition, some states require corporations to pay operation-specific taxes such as:

  • Sales taxes - A percentage of tax on the price of a sale that is collected by the business or customer and remitted to the appropriate government body.
  • Excise taxes - Taxes levied on certain goods and services including alcohol, fuel, and tobacco. Excise tax is imposed on the supplier or producer who then includes it in the product price.
  • Property taxes - Taxes levied on property the entity owns. This could include land, buildings, or industrial real property.
  • Employment taxes - Federal income, Social Security, Medicare, and federal and state unemployment taxes paid on behalf of the business for its employees.

When it comes to tax planning for your new business, it's important to fully understand your compliance requirements!

Be sure to fully understand your compliance requirements as a business owner!

Now let’s talk about federal taxes. Similar to how employees pay income taxes from their paychecks throughout the year, we as entrepreneurs are required to do the same, but instead at year-end—or quarterly if the total tax due exceeds $1,000.

However, business owners receive the best tax incentives from the U.S government as a reward for small businesses employing more than 47.3 percent of the U.S. private workforce. These incentives include more tax deductions related to operations and special tax credits. Be sure to speak with a CPA who is knowledgeable in your industry and can advise you on how to pay minimal taxes by taking advantage of all available tax deductions and credits. Be sure to speak with a CPA about the taxes for your business. Be sure to choose one who is knowledgeable in your industry and can advise you on how to pay minimal taxes by taking advantage of all available tax deductions and credits.

 

T-Mobile does not offer or endorse any tax, legal, financial, or other advice; the opinions, insights, and recommendations of our contributors are their own. Contact professional advisors for advice.

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