Tax Considerations for New Businesses

I’m starting a new business. Can you tell me what’s most important from a tax perspective?




This is a tough question to answer. There are many issues to consider, but reducing the tax burden should be your overarching concern when starting a new business. Beyond that there are as many exceptions as there are tax rules, and you really need to meet with a professional advisor to uncover them all. Here’s a broad outline to get you thinking about the basics.

Incorporation

Whether or not to incorporate your business is a complex question you must take to your lawyer and CPA, as there are both advantages and disadvantages to being incorporated.

If a corporation is formed, the next question is whether to form a C or an S corporation. The difference between the two is the manner in which they are taxed. An S corporation’s income is reflected on the owner’s tax return, and the S corporation does not pay federal tax as a general rule. C corporations pay federal tax just like you and me.

Accounting Method

Which method of accounting you use (cash based or accrual based) to reflect income on the tax return could have an effect on taxes. This is another question to ask your tax advisor.

Fiscal Year

If you can, choose a fiscal calendar that coordinates best with your business cycle. Many businesses have the ability choose their fiscal year; however, the IRS requires some business to use a calendar year. It depends on how the business is structured. Again, another issue that has to be considered individually with a professional.