Businesses

The Business Plan

Do you have an entrepreneurial spirit? Do you desire to be your own boss? Many people have the desire and some solid ideas for a new business, but they either lack the courage to take the first step or they don't know where to start. Here is some information that may help guide you to take those first steps.

Develop a Business Plan

  • This is the blueprint of your operations for the next couple of years. You control the level of detail, but it should cover:
    • The type of business, product, or service offered
    • Types of customers
    • Pricing
    • Start-up capital
    • Forecasting of revenue and expenses
    • Marketing plans
  • For help, consult sources at the public library, over-the-counter computer software, the Chamber of Commerce, local colleges, and web sites like that of the Small Business Administration at www.sba.gov/starting.
  • A business plan is important to obtaining a business loan to set up operations.

Registration of Business

  • From a tax standpoint, you need to decide whether you're going to embark on this endeavor alone as a sole proprietor, or with others as a partnership.

* You may also want to consider incorporating.

  • Depending on which you choose, you may have to deal with legal ramifications.

    • Some states allow you to just start a business.
    • Other states require you to register the type of business and follow certain guidelines before you are able to open the doors.

Location of Business

• The location could be crucial, depending on the business type.

• Parking, space, and cost are all important considerations.

Tax Considerations

  • Most businesses need an employer identification number (EIN). This number is the equivalent of the Social Security number for a business.
    • A federal EIN can be obtained by filing Form SS-4, Application for Employer Identification Number.
    • Form SS-4 is available from your tax preparer, the IRS, or the Social Security Administration.
    • Form SS-4 can be mailed, faxed, or submitted by tele-TIN to the IRS service center for your area.
  • This number will need to be on all employee payroll reports.
  • Any entity other than a sole proprietorship must have an EIN to file income tax returns, even if it does not have any employees.
  • Additionally, your state will probably require a state identification and/or sales tax number for the same reasons.

Employees

  • If you plan to have employees, you are generally responsible for:
  • Payroll taxes
  • Social Security taxes
  • Medicare taxes
  • Unemployment taxes
  • Collection of federal and state (where applicable) withholdings
  • Employee's share of Social Security and Medicare taxes
  • As an employer, you are responsible for making deposits of the collected taxes at the appropriate times throughout the year.
  • On a quarterly basis, file Form 941 to inform the government of the withholdings and payments.
  • Form 940 for unemployment tax information is required annually.
  • Failure to file and pay on a timely basis could result in severe penalties.
  • Some employers avoid the payroll cycle by treating individuals as independent contractors.
    • The IRS has issued a set of criteria it uses to determine whether an individual is an employee or an independent contractor.
    • If you incorrectly treat an employee as an independent contractor, you may be subject to penalties.
    • Before you make this determination, discuss it with your tax advisor.
  • You may also need to make estimated tax payments for the business entity. The sole proprietor would be responsible for income tax and self-employment tax on the business profits.

Record Keeping

  • It is important to establish a good record keeping system early in your business.
  • An accurate account of the following is necessary:
    • Payroll records
    • All income and expenses related to the business
  • Most businesses have the option of choosing the cash method, the accrual method, or a hybrid method of accounting.
  • If the IRS were to audit your return, you may have to prove expenses by producing receipts.

Start-up Costs

  • Some expenses may need to be separated. The two categories are:
    • Expenses incurred in exploring and setting up the business. These may be amortized over a 60-month period beginning with the start of the business.
    • Expenses incurred from the time the business officially begins. These are currently deductible.
  • Start-up expenses may include training wages, pre-opening utilities, rent, advertising, depreciation, and any exploration costs.

Capital Expenditures

Not all of the expenses paid for a business are currently deductible.

  • Items that have a life of more than one year are currently depreciated or amortized, rather than deducted.
  • Equipment and real estate are common examples of depreciable assets.
  • If your business requires you to maintain an inventory of the items you sell or use to make a product, these costs become part of inventory and are deducted as you sell the product.
  • It is necessary to keep accurate records of the beginning and ending inventory each year.

Other Considerations

Record Keeping

  • It is important to establish a good record keeping system early in your business.
  • An accurate account of the following is necessary:
    • Payroll records
    • All income and expenses related to the business
  • Most businesses have the option of choosing the cash method, the accrual method, or a hybrid method of accounting.
  • If the IRS were to audit your return, you may have to prove expenses by producing receipts.

Start-up Costs

  • • Some expenses may need to be separated. The two categories are:
    • Expenses incurred in exploring and setting up the business. These may be amortized over a 60-month period beginning with the start of the business.
    • Expenses incurred from the time the business officially begins. These are currently deductible.
  • Start-up expenses may include training wages, pre-opening utilities, rent, advertising, depreciation, and any exploration costs.

Capital Expenditures

Not all of the expenses paid for a business are currently deductible.

  • Items that have a life of more than one year are currently depreciated or amortized, rather than deducted.
  • Equipment and real estate are common examples of depreciable assets.
  • If your business requires you to maintain an inventory of the items you sell or use to make a product, these costs become part of inventory and are deducted as you sell the product.
  • It is necessary to keep accurate records of the beginning and ending inventory each year.

Other Considerations

  • Liability and asset protection.
  • Fringe benefits desired (if any).
  • State and local requirements, such as licenses, permits, and registration of the business.

 

 

This brochure contains general tax information for taxpayers. As each tax situation may be different, this information should not be relied upon as your sole source of authority. Please seek professional advice for all tax situations.

#843 - ©Copyright 2004

National Association of Tax Professionals

720 Association Drive

PO Box 8002

Appleton, Wl 54912-8002

www.natptax.com