BY APRIL MAGUIRE
IF YOU are planning to start your own
small business, it’s important to pay attention to your tax responsibilities in the early
stages of formation in order to maximize
deductions and prevent liability issues as
you move forward. Here are a few things
every new small-business owner should
know about federal income taxes.
Your legal entity and your tax burden
From sole proprietorships and limited
liability companies to S corporations and
partnerships, there are various business
types, each with its own benefits and limitations. For example, S corporations offer
small-business owners the advantage of
paying taxes at the shareholder level,
rather than being subject to higher corporate rates. However, a company of this
kind must be limited to 100 shareholders
and feature a single stock class. On the
other hand, while C corporations can
deduct a wider range of expenses and
include hundreds of shareholders, these
groups must contend with double taxation.
How much you can deduct
The various operational costs of a start-
up—e.g., raw materials, employee salaries,
business rent, utilities—can be overwhelm-
ing. Fortunately, as a new small-business
owner, you may be able to deduct a num-
ber of expenses in order to minimize your
According to the IRS, businesses can
deduct both ordinary and necessary expenses. Ordinary expenses refer to those
that are common to your specific trade,
meaning what’s reasonable for one company may not be relevant for another.
Necessary expenses are helpful (but not
always obligatory) in your field.
The most common business deductions
include rent on a business or home office,
supplies, furniture and equipment, such as
computers, copiers and fax machines.
Additionally, many small businesses can
deduct costs associated with providing
health care benefits for their employees.
The IRS also allows small-business
owners to deduct a wide array of startup
expenses before they open their doors to
customers. Although startup expenses can
New small business?
What to know about federal income taxes
Costco offers many small-business services,
including QuickBooks Online and Intuit
Online Payroll Services ( QuickBooks.com/
CostcoBiz), to help track costs, manage
taxes and more. For more information,
go to Costco.com and click “Services.”
differ by industry, most business types can
deduct investigational costs related to
researching markets and analyzing products. Additionally, startups can deduct
costs accumulated before they open for
business, such as training employees,
attending trade shows and seminars,
locating suppliers and advertising to
potential clients. While companies cannot
deduct licensing and incorporation fees as
startup expenses, these costs may be
deductible as incorporation expenses.
Making estimated payments
Startup founders are excused from
making estimated tax payments in the
first year of operation. They are responsible for submitting accurate quarterly payments in the years to come. Business owners filing as sole proprietors, partners and
S corporation shareholders must all make
estimated tax payments if they anticipate
owing $1,000 or more for the tax year.
Filing estimated tax payments for the
first time? You may want to use last year’s
income, tax credits and deductions to calculate your expected tax burden. Business
owners who fail to submit at least 90 percent of the taxes they owe may be subject to
penalties, so perform your due diligence to
ensure you’re in the clear.
Paying self-employment tax
Comprising Social Security and Medi-
care taxes, self-employment tax is paid by
workers whose income is not subject to
employer withholding. As a self-employed
person, you are responsible for both your
own portion of the self-employment tax
and the half typically paid by an employer.
To ease the burden at tax time, small-business owners should remember to
deduct the employer-equivalent component of their self-employment tax. Business owners can claim half of what they
pay in self-employment tax as an income
tax deduction, so a $5,000 tax payment
decreases income by $2,500. Additionally,
it’s important to take advantage of all possible business and startup expenses to
limit net income and, by extension, your
self-employment tax burden.
As a final point, you may want to consider hiring a tax adviser to help you maximize deductions while ensuring your
startup is meeting its tax burden. Not only
does working with a professional safeguard your business and your personal
wealth, but it also allows you to focus on
what matters: building your company into
a successful operation. C
April Maguire regularly covers small-business topics.