IRS offers tips to new business owners

Starting a business can be a challenging endeavor. There are many pitfalls on the path to success, and many startups suffer down the road from mistakes made early on. The IRS, via various financial publications nationwide, regularly releases information to help new business owners avoid certain fatal errors.

Here are some considerations tax gurus urge small business owners to keep in mind:

• Type of Business: Before starting a business, one must decide what kind of business it will be. Options include sole proprietorship, partnership, corporation and limited liability corporation. Each type of business has different tax implications.

• Employer Identification Number (EIN): A business generally needs to register for an EIN, which acts like a social security number for a business. The EIN is a business' tax identity. IRS.gov has information about which types of entities require EINs and how to apply for one.

• Recordkeeping: Good recordkeeping is vital to the success of any business. Accurate, accessible records allow business owners to keep track of deductible expenses, prepare tax returns, track the progress of their business and prepare financial statements.

• Tax Year: All businesses must calculate their taxable income on an annual basis. This basis, called a tax year, can either be a calendar year or a fiscal year.

• Accounting Method: Establishing an accounting method early on and sticking to it is critical to the long-term success of a small business. The two most popular accounting methods are the cash method and the accrual method. With the cash method, income is reported in the tax year it is received and expenses are deducted in the tax year they are paid. Under the accrual method, income is reported in the tax year it is earned and expenses are deducted in the tax year they are incurred.

A new business is an exciting prospect. However, an oversight of important tax necessities can quickly turn into a problem. Partnering with an attorney experienced in business formation and planning and help ensure that new business owners are taking the prerequisite steps in getting their business underway the right way.

Source: mainstreetbusinessjournal.com, "IRS Can Help When Starting a Small Business," Aug. 2, 2012