Washington, DC (January 23, 2007)—No matter how much planning goes into starting a small business, overlooking the tax issues can sink the best-laid plans.
 
“Many hard-working small business owners are unaware of the tax aspects of self-employment, or just assume that their accountant will figure it all out for them the following April 15. By that time, it might be too late,” advises Jack Wood, EA, President of the Arizona Society of Enrolled Agents (AzSEA).

As is the case with many other aspects of a new business, the tax issues can best be managed through a combination of adequate initial planning, reliance on professional advice, a commitment to follow through on tax compliance requirements, and the ability to make informed decisions in response to changing circumstances.

When starting a new business, you need to determine which type of business organization (sole proprietor, partnership, corporation or Limited Liability Company) would be most appropriate for your situation. You will need to determine how best to record business income and expenses. You will have to distinguish between the “cash” and “accrual” methods of accounting. You should establish a separate business checking account, and you may or may not want to use a computerized accounting package. You will want to determine who will maintain your business records – you, or your adviser? These initial planning decisions are more important than most entrepreneurs recognize.

The initial planning stage is the time to find a professional tax advisor who can help you make these decisions. An enrolled agent (EA), a certified public accountant (CPA) or an attorney can explain the advantages and disadvantages of different business organizations. An attorney can help you set up a corporation or LLC. An EA or CPA should explain how to record business income and expenses, and which accounting method is appropriate. The EA or CPA should explain how net profit from the business will be taxed, and what self-employment tax is and how it is calculated. The same is true for estimated tax, which is how self-employed persons prepay their projected tax on a quarterly basis. The EA or CPA should explain the difference between employees and independent contractors, as well as the rules regarding employment taxes.

Understanding tax compliance requirements and following through on them is essential. Business income and expenses must be recorded accurately on an ongoing basis to permit the preparation of profit and loss statements and the filing of tax returns. The projection of net business income is crucial for the payment of estimated taxes.  Business owners with employees must understand how to calculate Federal tax deposits, and the absolute importance of making the deposits on time.

An ongoing relationship with your tax professional and up-to-date business financial records will help you make informed business decisions when circumstances affecting your business change suddenly. The decision you make may not be the one you prefer, but it will be the one that helps you avoid tax problems.

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