Guide future business owners through early tax decisions

Maureen mentions she’s thinking about starting a catering and events business. She hasn’t booked her first gig yet, but she could already benefit from guidance on entity choice and tax setup. Before the business gets too far down the road, a practitioner can help Maureen make tax choices that fit how the business will actually operate and avoid having to untangle those choices at filing time.

The IRS tells future business owners to consider their business structure, tax year, EIN requirements, employee responsibilities, applicable taxes and state requirements before getting underway. For tax professionals, these basics can become a useful pre-opening conversation rather than a filing-season cleanup project.

Get the tax situation lined up before activity starts

Business structure affects how income is reported and which return the business files. A sole proprietor generally reports business activity on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), while partnerships and corporations have separate filing requirements. An LLC’s federal tax treatment depends on its classification and elections. NATP’s Basics of Business Entity Taxation series can help practitioners compare federal filing and reporting rules across business structures.

The business’s tax year should be confirmed early, too. The available tax year can depend on the entity and applicable tax rules, and it sets the reporting cycle the owner will need to follow.

The owner may need an employer identification number (EIN) before operations begin, and eligible owners can use the IRS Business Tax Account to access and manage certain federal tax information online. The business also needs records that clearly show income and expenses and support the amounts reported on its return.

A separate business bank account will make the records easier to follow. Keep receipts and other supporting documents, like invoices, in a way that links them to the transactions recorded in the books.

If the owner will have employees, address payroll and employment-tax responsibilities before wages start going out the door. The setup review should also flag state or local registration and other tax obligations that may apply where the business operates.

A short pre-opening review can focus on answering these questions:

• How will the business be structured and taxed, and what tax year will it use?
• Does it need an EIN or any state or local registrations before operating?
• How will the books capture income and expenses, with support for each entry?
• Will the owner need help planning for payroll or taxes that are not covered by withholding?

Flag costs before the owner assumes they are deductible

New owners typically spend money on expenses before the business officially opens. These start-up costs may receive different tax treatment from expenses incurred after an active trade or business begins. Property expected to benefit the business beyond the current year may need to be capitalized and recovered under the applicable rules rather than deducted as a routine operating expense.

Watch and assist with recordkeeping. If the owner waits until tax season to sort a year of purchases, it can be much more difficult to determine when the business began or how a cost should be treated.

This same early conversation can prepare the owner for taxes that do not look quite like an employee’s withholding. A self-employed owner may have income tax and self-employment tax obligations and may also need to make estimated tax payments during the year. The business’s structure and whether it hires workers can add even more filing and payment responsibilities.

Use NATP’s client newsletter to start the conversation

NATP members already have a client-facing tool for this situation. The Starting a Business client newsletter is written for prospective business owners. It covers the early decisions clients are likely to encounter, from business structure and registration through recordkeeping, hiring responsibilities and tax obligations.

Send it to a client who mentions opening a business or share it with a prospective client who is still in the planning stage. It can open the door to a planning appointment while the owner’s setup decisions are still flexible.

Getting involved before the business opens gives the practitioner a chance to reduce avoidable cleanup later while helping the owner begin with tax procedures that benefit the business.

Learn more about what an NATP membership does for you.